A Wafer-Thin Mint

Thu, Jan 24, 2013 - 12:42pm

Wow, there's a lot going on today. As expected, gold's getting whacked ahead of option expiry and FND. Silver is getting shoved back, too, but all must be well...the stock market is up again!

However, none of this concerns me nor should it concern you. As discussed yesterday, the metals have had a nice, little 3-week rally and were due for a pause. I speculated last evening on TTM that gold would likely fall toward its 200-day moving average near $1668. It has and I would expect price action to center around this level for the next few days, at least through the Monday Feb13 option expiration.

Also, never forget that when we head toward option expiration on the heels of a rally, there's always Cartel money to be made by putting the fear of God into those who foolishly sold puts into the expiration. Recall that it works something like this:

  • Sheep hedge fund/money manager sees the rally and thinks, "Hey, I can sell the 1675 puts for $X and, as long as gold is above 1675 on Monday, I'll never have to cover them. This looks like free money".
  • Uh-oh. Price starts to fall away from 1690 and said Sheep begins to get nervous.
  • At 1680, Sheep begins to consider covering at a loss but is unwilling because price may still rally back and, sheesh, expiration is only two trading days away.
  • At 1675, the Sheep panic. Now at a steep loss, the only sensible move is to sell some futures contracts to hedge.
  • This additional spec selling drives price even lower.
  • At this point, The Cartel fleeces the sheep by buying all that The Sheep are selling and price reverses.
  • Ultimately, by option expiration, price is back above 1675 and the "sold" puts, so vigorously defended by the Sheep, actually do expire worthless.
  • The Sheep have been fleeced and The Cartel rings the register on another easy trade.
  • Anyway, the moral of the story is that its all nonsense. Contrived manipulation to game the fools who continue to allow themselves to be gamed in the first place. By next week, the fundamentals will re-assert themselves and both metals will be set to resume their 2013 rallies.

    One of those fundamentals is the current, overwhelming demand for silver. Though there is plenty of reasonable debate regarding a silver "shortage", in this case, as in most everything metal-related, perception is reality. Take the situation at the U.S. Mint, for example.

    Having The Mint run out of current supply and suspend sales is nothing new. This has been happening occasionally since 2008. It IS due to investor/collector demand, that much is undeniable. The question I want you to ponder today is: Is there going to be sufficient supply of ASEs going forward to meet demand and defuse this perception of shortage?

    Please play along with this thought experiment. Let's say, for a moment, that you are the Chief Procurement Officer for Silver at the U.S. Mint. Your job is to predict ASE demand and order, well ahead of time, enough silver and coin blanks to meet this public demand at some point in the future. How would you go about doing this? Keeping in mind, of course, that you are a government bureaucrat who is not paid to be proactive or think "outside the box". I would imagine that you would guage future sales by reviewing past sales. That sounds reasonable, doesn't it? OK, let's start there then.

    In December of 2010, The Mint sold 1,772,000 ASEs and in December of 2011, they sold 2,009,000. Knowing this and knowing that total ASE demand for 2012 was showing a run rate at about 25% below 2011, how much silver do you think you'd order and have on hand for December 2012? 2MM ounces? 1.5MM ounces maybe? Well, I don't know but what I do know is this: The Mint suspended sales on 12/17/12 after December sales had reached 1,635,000 ounces. Why did they suspend sales? They were out of silver, of course.

    Now this creates a problem. Suspending sales doesn't make demand simply go away. In fact, it makes it worse as the public reads the headlines about the suspension of sales and senses a shortage. Demand for the remaining two weeks of 2012 simply builds up and rolls over into January, when The Mint finally resumes sales.

    Uh-oh. You, as the CPOS (I'm just making that up), only ordered about 6MM ounces for January. Why? Because in January of 2011, the biggest selling month of ASEs ever, The Mint sold 6,422,000 and last year, The Mint sold 6,107,000. And since 2012 demand was down 25% from 2011, you decided that it was unlikely that you'd need more than 6MM ounces this January but you went ahead and ordered 6MM ounces anyway. We all know what happened next...The pent-up demand from 2012 combined with fresh, new 2013 demand wiped out all of your 6MM ounces in the first two weeks and The Mint was forced to suspend sales again on 1/13/13 after sales reached 6,007,000.

    Now you're really in a bind. There's got to be anywhere from 3MM to 5MM in pent-up demand in your system, waiting to get filled as soon as you resume sales next Monday. The problem is, you still don't have enough metal on hand. In February of 2011, The Mint sold 3,240,000 ounces and last year sales fell off to just 1,490,000 ounces. Knowing this, you ordered just 2MM ounces for February. Chances are high that The Mint will open for sales on Monday and then have to turn around and close again on Tuesday. Or maybe Wednesday. But you get the picture.

    It would appear that The Mint has put themselves into a perpetual state of sales/production backwardation (to bastardize the futures market term) and they are left with only a couple of options, both of them bad for The Bad Guys but good for us.

    1. They could simply go out and secure a whole bunch of silver in order to meet demand, something like 10MM ounces or so. This is unlikely though because 1) Finding 10MM ounces isn't easy, unless you're the custodian of SLV and 2) It would cost a lot of money that currently isn't in The Mint's 2013 budget and what bureaucrat is going to be sticking his/her neck out on that one?
    2. They could simply leave the market for ASEs in this current state of disarray, only opening for sales for days or hours at a time.

    I've got to believe that #2 is the option they'll choose and where does that leave us? An ever-increasing perception of extreme physical tightness. Again, it matters little whether or not The Mint could go out and procure the 10MM ounces they need to get "caught up". What matters is the perception that physical silver is in very short supply, otherwise "why would The Mint always be shut down to new orders?". Premiums will continue to rise for all other new and existing forms of silver bullion and this excitement will, eventually, bleed over to the paper market as other bullion producers seek or feel forced to lock in forward contracts and speculators try to cash in on all the excitement.

    And this is what I mean by (perception = reality). Something like this Mint situation could easily generate its own momentum in the headlines, the public and the market. Shorts could begin to get squeezed and we might even see a repeat of Feb-April 2011 paper price performance. Throw in any other "news" events like QE∞ and U.S ratings downgrades and the potential becomes decidedly real.

    Here's one other thing for you to consider: Has the Treasury Department been planning for this eventuality all along? The law used to read that The Mint had to supply enough silver coins to meet the public's demand. See here: https://codes.lp.findlaw.com/uscode/31/IV/51/II/5112. The actual point was marked with a number (2), section (e):

    (e) Notwithstanding any other provision of law, the Secretary
    shall mint and issue, in quantities sufficient to meet public
    , coins which -
    (1) are 40.6 millimeters in diameter and weigh 31.103 grams;
    (2) contain .999 fine silver;
    (3) have a design -
    (A) symbolic of Liberty on the obverse side; and
    (B) of an eagle on the reverse side;

    Interestingly and sneakily, the law was changed in 2010. See here: https://www.law.cornell.edu/uscode/text/31/5112. It now reads:

    (e) Notwithstanding any other provision of law, the Secretary shall mint and issue, in qualities and quantities that the Secretary determines are sufficient to meet public demand, coins which—
    (1) are 40.6 millimeters in diameter and weigh 31.103 grams;
    (2) contain .999 fine silver;
    (3) have a design—
    (A) symbolic of Liberty on the obverse side; and
    (B) of an eagle on the reverse side;

    Note the subtle difference. No longer must The Mint "meet public demand". Now, The Mint must simply make as many ASEs as the SecTreas requests. Hmmmm, now why would they do that? What's the big deal? If silver is just laying around all over the place, collecting dust, why can't The Mint simply produce a seemingly endless supply for an insatiable public? Chew on that one for a while.

    So, anyway, what's the point? I firmly believe that we are on the cusp of another, major rally in silver and these actions/inactions by The Mint only help the cause. The state of perpetual ASE shortage created by The Mint will serve to exacerbate demand for both physical and paper metal. This demand will drive prices higher in an increasingly strong feedback loop as we head through the next few months.

    Therefore, buy the dip and take delivery...if you can.


    About the Author

    turd [at] tfmetalsreport [dot] com ()


    Mr. Fix
    Jan 24, 2013 - 12:50pm

    It took forever to refresh the page.

    Congratulations to those above me, I was really trying, but I got locked out.

    Thank you for all you do Turd!

    Jan 24, 2013 - 12:51pm

    Double post

    Got lost in the excitement.

    Jan 24, 2013 - 12:51pm

    Top 10

    My lucky day, should I celebrate by buying a lottery ticket or stopping by the LCS.


    Jan 24, 2013 - 12:52pm

    Silver is sooo pretty

    Video unavailable

    it's nice to see young folks waking up to the truth

    Jan 24, 2013 - 12:54pm

    Removed comment

    Removed comment.

    Jan 24, 2013 - 12:56pm

    Not to mention

    That we also have the Canadian Mint rationing as well, further creating the perception of a supply issue.

    Prize Fighter
    Jan 24, 2013 - 12:57pm

    Those aren't real "firsts"

    Those aren't real "firsts" when they hedge a post with "." placemarkers. Man up to the keyboard you hoarders!

    Jan 24, 2013 - 12:57pm


    ... and we have FOMC meeting and unemployment rate next week. Interesting week ...

    Jan 24, 2013 - 12:59pm


    Like your thinking here turd

    Jan 24, 2013 - 12:59pm

    a thin wafer

    Monty Python a thin mint (wafer):

    Video unavailable
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