How To Beat A Gold Shortage

July 17, 2013

Gold is sold out! Or so you might think if you miss the true nature of coin supply.

 

Over the last few years, during the great investment demand for gold and silver, we have seen sporadic shortages in bullion coins.

Many people have written about these shortages as a harbinger of things to come in precious metals. One of the fads is to decry supply issues in silver and now recently gold. However, the truth of the matter is less dramatic, if not quite so simple.

In most cases, supply issues with silver or gold coins are caused by abnormal, or let's say, surprising, increases in demand from bullion coin buyers. Simply put, coins don't come out of thin air. They need to be manufactured. This all takes time and money. No one wants to tie up their money in a product that’s not going to sell. That exposes gold and silver buyers to "just in time" inventory gaps if it's coins they want to buy.

Imagine you’re selling a low-cost product with a high margin. It’s much more likely that you will have enough inventories for almost all eventualities. Look at a typical retail product—how about lip balm? I don't really know the costs, but I can guess. Some of the premium brands sell individually for $10 each and more, but many quality brands sell for $1.00 or so.

I have never seen a retailer that sells this product run out. Though it is possible, most likely that chance is very remote, because I believe their profit margin is around 100 percent or more. This typically is called the Keystone markup. My guess is that the retailer pays less than 50 cents for each one of these $1.00 lip balms. So their profit of 50 cents or more covers any carrying charges that may be represented from holding the inventory.

Now let's take a look at gold coins. The price of gold currently is $1,250 an ounce. If I’m a distributor selling gold coins and the average quantity I sell in a month is 5,000 one-ounce coins, that represents sales of $6.25 million, plus my margin. This not only is a lot of gold but represents a lot of money.

Do I always have on hand 5,000 ounces of gold? No, because financing eats away at the profitability, even at today's low cost of interest. Also, tying up the capital in inventory may not let you properly cover all your expenses such as salaries, health care, supplies and utilities. So in the end, I may stock 500 coins, or maybe 1,000 at a time.

If I were making a 100 percent markup, then I may carry 5,000 ounces. But that doesn’t exist in the gold coin industry. The wholesaler is lucky to make a quarter to half a percent per ounce. Without doing the math, it's obvious that financing costs are significant in this scenario.

But a comparison of the inventory of holding the full amount at 6 percent financing would represent an overhead of more than $31,000 a month. Holding only the 1,000 in inventory at 6 percent is a little more than $6,000 per month. This doesn't even take into account all the other factors in running a coin business.


Find your next ETF

Reset All