Last week premiums on Silver Eagles jumped as word spread that the U.S. Mint had run out and would ship no more this year. However, at the start of this week, the Mint revealed that it would produce more Silver Eagles before year-end.

The Mint gave no indication of how many Silver Eagles will be turned out, but because premiums fell back to normal levels it appears that the wholesalers think sufficient quantities will be minted to meet demand over the next few weeks.

Rumors spread around the Internet that the shortage of Silver Eagles was because of a shortage of silver. That was not the case. The Mint routinely shuts down production in November to begin production of the next year’s coins so that they can be shipped in early January, usually the first week.

This time, however, the shutdown came with fairly strong demand, and dealer inventories were depleted rapidly. That the Mint would reopen production shows that it has some sensitivity to the marketplace.

Silver Eagles are the best selling government 1-oz silver pieces in the country. So, why give the Royal Canadian Mint a chance to fill the void with its 1-oz Silver Maple Leafs?

As noted in the November 23rd post, last week the Mint reopened production of its 1-oz Gold Eagles when dealers’ inventories became low. Gold Eagles are the best selling 1-oz gold bullion coins in the world, and they dominate the U.S. gold bullion coin market.

Still, if concerns about the dollar continue to grow, gold and silver buying could cause Silver Eagles and Gold Eagles could again be in short supply before year-end. Silver Eagles in a mint-sealed box sell at $1.75 each over spot. The U.S. Mint prices Silver Eagles on the London market, which normally runs a few pennies higher than the U.S. market.

The U.S. Mint recently announced that it would ship no more 1-oz Gold Eagles until January 2008. This policy has become the norm for the Mint toward year-end when it shuts down production of current-year coins to prepare for minting the ensuing year’s coins. The announcement resulted in an immediate jump in the premiums on 1-oz Gold Eagles.

However, just before Thanksgiving the Mint told its authorized distributors that they will get at least one more chance to buy 2007-dated 1-oz Gold Eagles before year-end. That announcement resulted in premiums on 1-oz Gold Eagles dropping back to normal levels. However, if the authorized distributors sell out their “reloads” before year-end, premiums will jump again. If the distributors’ coins last to year-end, premiums can be expected to stay at normal levels.

Only five U.S. distributors are eligible to buy coins from the U.S. Mint. (Gold Eagles are distributed via the classic manufacturer, wholesaler and retailer system. The Mint is the manufacturer; the authorized distributors are the wholesalers; and firms such as CMIGS are the retailers.) Because the distributors lose sales when they run out of Gold Eagles, when the U.S. Mint makes what has now become an annual announcement about ceasing production of 1-oz Gold Eagles, the distributors jack up their prices to compensate for potential lost sales.

Gold’s price volatility also has impacted premiums on Gold Eagles in the secondary market and on Krugerrands, which are the quintessential bargain coins and trade only in the secondary market.

Big moves to the downside always bring bargain hunters into the market. These are investors who buy only on price drops. They want low prices. So, because Krugerrands carry the smallest premiums of the widely known 1-oz gold bullion coins, many bargain buyers prefer Rands. In this way, price volatility increases the premiums on Rands.

A final note about premiums: The U.S. Mint sells Gold Eagles at percentage markups over spot (London spot, for Silver Eagles as well as Gold Eagles). The higher the price of gold climbs, the higher the absolute markup.

Today, twenty 1-oz Gold Eagles carry premiums of about $40 to $45 each. (Secondary market 1-oz Gold Eagles usually always carry smaller premiums than new coins; however this is not always the case. Big demand sometimes depletes the inventories of secondary market wholesalers. When that happens, to have coins for their customers secondary market wholesalers have to buy from authorized distributors.)

When gold traded at the $300 level, twenty 1-oz Gold Eagles carried premiums of about $17. With gold in the $800 area, those premiums climb to $40 - $45. This, of course, makes Krugerrands even more attractive to bargain buyers.

I’ve written before that most CMIGS’ clients know more about the machinations at the Fed than the presidential candidates. That’s not exactly true, however. I would not say that most clients, nor I, know more about the workings of the Fed than GOP candidate Ron Paul.

Ron Paul has studied Austrian Economics, which is adamantly opposed to the concept of central banking, for more than thirty years. He has gone head to head with Fed chairmen during their mandatory appearances before joint congressional committees. When it comes to the Fed, Ron Paul knows of what he speaks.

Further, Ron Paul knows that gold is sound money and has called for a return to the gold standard. The other candidates, however, would prefer to ignore the issue. Actually, many so-called sophisticated columnists consider Ron Paul “a fruitcake” because of his stand on money.

Unfortunately for the other candidates, Ron Paul’s position on money is gaining a little traction, which means the other candidates may have to either join Ron Paul in calling for a return to the gold standard or start defending Keynesian economics, which has been the foundation for government intervention in the marketplace since the 1930s and are the reasons our federal government stands on the edge of bankruptcy.

Murray Sabrin has written an article for usatoday.com about Ron Paul’s position on sound money. Articles by Ron Paul can often be found at www.lewrockwell.com, a libertarian website. Here’s one I like, his Statement Before the Joint Economic Committee, November 8, 2007.

Tourists to the Taj Mahal and other famous landmarks in India will no longer accept dollars for entrance fees. Indian officials blame the dollar’s decline in foreign exchange markets as the reason.

In India, the rupee, a currency rarely accepted outside India, is now preferred to the world’s primary reserve currency. This is further evidence of the damage done to our once proud dollar by massive federal deficit spending.

The World Gold Council (WGC), an international organization supported primarily by the gold mining industry, has the goal of increasing public awareness of gold and the demand for gold. In October 2002, James E. Burton was appointed head of the World Gold Council (WGC).

Despite not having experience in the gold industry, Burton engineered several programs that have had great impact on the demand for gold, the most significant being exchange traded funds, ETFs as they are commonly known. Burton also encouraged and spearheaded the massive advertising that we now see for gold jewelry.

Although ETFs are not our recommended way of “owning” gold, they have increased the demand for among investors who choose not to physically handle gold. I put “owning” in quotes because when you buy ETFs you do not “own gold” but shares in a fund that owns gold. ETFs are another form of “paper gold.” Regardless, ETFs have impacted the gold market in a positive way.

An interview with Burton has been posted on resourceinvestor.com. It’s an informative read for gold investors who want to get a better understanding of the gold market.