Dr. Constantin Gurdgiev: If you’re looking for bubbles, don’t look at gold coins

Dr. Dr Constantin Gurdgiev, Head of Research with St Columbanus AG, member of the investment committee of GoldCore and the adjunct lecturer in finance in Trinity College, Dublin.

Of all asset classes in today’s markets, gold is unique. And for a number of reasons.*

Firstly it acts as a long-term hedge and a short-term flight to safety instrument against virtually all other asset classes.** Secondly, it supports a wide range of instruments, including physical delivery (bullions, coins and jewellery), gold-linked legal tender, gold-based savings accounts, plain vanilla and synthetic ETFs, derivatives and producers-linked equities and funds. All of these are subject to diverse behavioural drivers of demand. Thirdly, gold is psychologically and analytically divisive, with media coverage oscillating between those who see gold as either a long-term risk management tool, or a speculative “bubble”.

In the latter context, it is interesting to look closer at the less-publicized instrument — gold coins, traditionally held by retail investors as portable units to store wealth. Due to this, plus demand from collectors, gold coins are less liquid and represent more of a pure ‘store of value’ than a speculative instrument.

Classical bubbles arise when speculative motives (bets on continued accelerating price appreciation) exceed fundamentals-driven motives for holding gold. In later stages of the “bubble”, we should, therefore, expect demand for gold coins to fall compared to the demand for financially instrumented gold.

The U.S. Mint data on sales of gold coins suggests that we are not in the last days of the “bubble”. But there are warning signs to watch into the future.

August sales by the U.S. Mint were up a whooping 170 per cent year on year in terms of total number of coins sold, while the weight of coins sold is up 194 per cent. On the surface, this gives some support to the theory of gold becoming overbought by retail investors. However, monthly comparatives reflect a huge degree of volatility in U.S. Mint sales and August results comfortably fit within statistical normals for the crisis period since January, 2008. August results also fall within the historical mean (1987 through Monday).

At 112,000 oz of gold coins sold, August, 2011 is only the 19th busiest month in sales since January, 2008. Since 1988 there were 87 months in which average gold content per coin sold by the U.S. Mint exceeded the August, 2011 average and on 38 occasions, volumes of gold sold exceeded last month’s. In other words, current gold coinage sales do not represent a dramatic uptick in demand.

The data also shows that physical demand for coins is largely independent of the spot price of gold. Historically, since 1986, average 12-months rolling correlation between the spot price of gold and the volumes of gold sold in US Mint coins is negative at -0.09. Since January, 2008, the average correlation is -0.2. And over the last 3 years, the trend direction of gold spot price (up) and the volumes of gold sold in coinage (down) have actually diverged. The latter is, of course, concerning and will require closer tracking in months to come.

The chart above also highlights the fact that the current trend levels of U.S. Mint sales are significantly elevated on previous periods, with the exception of 1986-1987 and 1998-1999 demand spikes. Since the global economic crisis began, annual coinage sales rose sevenfold, from just under 200,000 oz in 2007 to 1,435,000 oz in 2009, before falling back to 1,220,500 oz in 2010. Using data through August, I expect 2011 sales to remain at around 1,275,000 oz.

Once again, the evidence above does not imply any definitive conclusions as to whether gold is or is not a “bubble”. Instead, it points to one particular aspect of demand for gold — the behaviourally anchored, longer-term demand for gold coins as wealth preservation tool for smaller retail investors. Given the state of the US and other advanced economies around the world since January, 2008, U.S. Mint data does not appear to support the view of a dramatic over-buying of gold by the fabled speculatively crazed retail investors that some media commentators are seeing nowdays.

Disclosure: I am long physical gold and hold no positions in other gold instruments

* These and other facts about gold are summarized in my recent presentation available at

** As shown in the recent research paper by Profs Brian Lucey, Cetin Ciner, and myself, covering the period of 1985-2009:

This article authored by Dr. Constantin Gurdgiev was originally posted on the Globe and Mail Blog on Wednesday, September 7, 2011. 

Mark OByrne