US Mint suspension of Silver Eagle sales explained

A great uproar was heard when the US Mint temporarily suspended sales of its 1-oz Silver Eagles, the world’s most popular government-issued 1-oz silver coins. The biggest outcry came from people who could not comprehend why the price of silver went down while the Mint admitted it could not meet demand. It’s not hard to grasp when you get the details.

First, sales of Silver Eagles do not drive the silver market. In its best year (2014), the Mint sold 44 million Silver Eagles, which is only 4.4 percent of average annual silver demand. The primary demand for silver is industrial, not monetary. This is not to say that silver is not a monetary metal, it is. The reality is that at this time the bulk of the demand for silver is industrial.

Sales of Silver Eagles reflect investor interest in silver, which is usually increased by rising prices, falling prices or concerns about financial instability (such as 2008-2011).

So, when all commodities sold off Monday (July 6, 2015) on the widespread news that China’s economy was slowing, silver took a hit. Admittedly, part of the downward pressure on silver came from speculators who took advantage of the situation. But, the primary pressure on silver (and other commodities) came because of fears about China’s slowing economy.

Now, to the US Mint’s suspending sales.

The Mint produces Silver Eagles based on its estimates of future sales, and sales up to the time of the suspension had been good, on track to rival last year’s 44 million. Still, summer sales are usually lackluster, and the Mint did not have a huge inventory.

So, when massive buying resulted from Monday’s price drop, sales exceeded what the Mint had on hand and it suspended sales. The suspension is not indefinite. According to the Mint’s notification to its Authorized Purchasers (wholesalers), it could be “two weeks.”

We have been down this road before, that is the Mint suspending sales. In times past there have been other reasons, such as a shortage of blanks from which the Silver Eagles are minted and the shutting down of production in order to switch to the manufacture of next year’s coins. (When the latter occurs, it nearly always in late November).

Sharp price declines—such as what we saw Monday–always result in increased buying. Consequently, Monday was a huge retail day for the metals, but as the week went on sales slowed. Still solid, but nothing like Monday’s sales. As a result of Monday’s buying, the US Mint ran out of Silver Eagles and announced the suspension of shipments. Immediately (and has been the case of past Mint shipment suspensions), the wholesalers hiked premiums.

Because sales slowed later in the week, I suspect that premiums will be coming back down next week.