Gold-market bulls couldn't buy publicity much better than this: The U.S. Mint says it has run out of 1-ounce American Eagle gold coins because of rocketing demand.
That may have helped fuel a sharp rebound in gold futures prices Thursday, although the metal also got plenty of help from rising U.S.-Russia tensions, a falling dollar and renewed buying of commodities across the board.
The Mint told coin dealers last week that its inventories of 1-ounce Eagles had been temporarily depleted because of "unprecedented demand." The Mint sells only to a small number of dealers, which then distribute the coins to other sellers, such as coin shops. The prices retail investors pay change daily and are based on the market price of gold plus a small premium.
The government has sold 60,000 1-ounce gold coins this month, up from 47,500 in all of July and just 13,000 in June. Sales of U.S. silver Eagle coins, meanwhile, have been hot all year, leading to rationing of those coins by the Mint.
Coin dealers confirm that they've been swamped with orders over the last month as the price of gold dived from $977.70 an ounce on July 15 to $786 last Friday, the lowest since December.
Small investors apparently saw the price drop as a great chance to buy -- the opposite of what normally happens, said Ken Edwards, a partner at California Numismatic Investments in Inglewood.
"Usually we see increasing buying activity as we go up and increasing selling activity as we go down," he said. "Not this time."
On Thursday, gold futures soared $22.70 to $833 an ounce. That's still well below the record closing high of $1,004.30 reached March 18.
The Mint obviously wasn't planning for a jump in demand. Now it's losing gold coin sales to other countries, including Canada, which makes the 1-ounce Maple Leaf.
"We are working diligently to build up our inventory and hope to resume sales shortly," the Mint said.
By running out at a time like this, the government could just stoke demand on the part of potential gold buyers who've been on the fence.
"It's human nature," said F. David Breahm, marketing director at dealer Blanchard & Co. in New Orleans. "When something's not there, people tend to want it."
Fannie, Freddie still borrowing
Now that Wall Street has hammered down the stock market values of Fannie Mae and Freddie Mac to a combined total that is less than the capitalization of toy maker Mattel Inc., the widespread assumption is that the Bush administration must soon announce a taxpayer-funded bailout of the mortgage giants.
Because if the stock market says the companies are goners, it must be true, right?
But Treasury Secretary Henry M. Paulson, who persuaded Congress last month to give Treasury the authority to rescue Fannie and Freddie if necessary, may not much care what the stock market thinks at the moment.
One reason is that Fannie and Freddie still are able to borrow in global credit markets to fund their mortgage finance operations. They're paying up to do so, but there continue to be buyers for their debt, as Freddie demonstrated when it sold $3 billion of five-year notes Tuesday.
The decision about the companies' financial viability "will be made in the bond market, not in the equity market," said Alex Pollock, a fellow at the American Enterprise Institute and an expert on Fannie and Freddie. "The day the bond investors get reluctant to buy is the day [the Treasury Department's] hand will be forced," he said.
That raises the question of whether foreign investors, in particular, will have enough confidence to continue buying Fannie and Freddie bonds with what is an implied Treasury guarantee. For decades, investors worldwide have assumed the companies' debt was safe, and only this summer did the question become a serious one.
They might well feel better if Uncle Sam just took control of the companies and made the debt guarantee official.
Fannie and Freddie continue to insist that they have adequate capital to carry out their mortgage missions, and their regulators agree. The stock market may have abandoned hope, but the companies are open for business every working day. It doesn't look like an emergency -- yet.
What's more, although there are some big names in the financial world calling for the companies to be nationalized -- wiping out shareholders immediately -- that doesn't fit with Paulson's long-term plan to preserve the companies as private entities.
Of course, any Treasury capital infusion would at the very least severely dilute current shareholders' stakes. If the Treasury bought into the companies via new preferred stock, for example, those securities certainly would be senior to the common stock.
In other words, if the companies eventually got back to strong financial health, the Treasury would be repaid, with interest, before stockholders got a penny.
In that context, investors may be correct in pushing Fannie and Freddie's share prices toward zero.
Money & Co.
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