Friday, June 8, 2012

The Perth Mint Regional Lockout (Guest Post)

Perth Mint locked out US customers from purchasing (directly) some of their most highly anticipated coins
The below is a guest post from 'Doomberg', a blog which has had some great coverage of new coin releases recently and would recommend those interested in such content to add the site to your favourites (or add the RSS feed to your reader). Today he talks about the recent decision by Perth Mint to lock US customers out from purchasing (directly from the Perth Mint) some of their most highly anticipated new release coins:

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One of the most recent products Perth released was its five ounce proof silver dragon. I was particularly interested in the product, even in the face of potential high premiums, because I do not yet have a "plain" proof silver dragon. I missed the regular one ounce proof variety as well as the three coin proof set. I was also unable to get the typeset, my only other real chance at a regular proof variety, due to problems with Perth's website. I was expecting very high premiums of $500 or higher on the five ounce proof silver dragon, so when I logged into Perth's site early in the afternoon on June 4, I was quite excited to see the relatively low price of $436... until I noticed another problem. US customers were barred from purchasing the five ounce silver dragon!

A growing problem that I've noticed is occurring with the Perth Mint recently is that they are starting to use regional lockouts to prevent US customers from buying any of their popular products. The US has been noted in this post and elsewhere as the world's largest coin market, and it is also the largest consumer of the Perth Mint's products. This had to led to some legitimate complaints from Australians that they are being shut out in favor of customers from the USA.

Perth has been experimenting with a variety of approaches to controlling the outflow of their coins. In March, for example, they introduced a queue system for the high relief silver dragon. I had some initial problems with using it but in the end, it turned out that it worked fairly well and prevented a massive rush like the one that knocked out Perth's website when the typeset went on sale. Perth has likewise experimented with selling its products at carefully spaced intervals to ensure that both Australian, US, and international customers would all get chances to order the coins. Starting last month, however, Perth began implementing regional lockouts to prevent US buyers from obtaining their coins at all, instead choosing to sell limited quantities of the coins to third party distributors for their US customers. In May, they sold the one ounce high relief kookaburra to Paradise Mint, and they sold the five ounce proof silver koala to Asset Marketing Services Inc. (AMS), which is distributing those coins through New York Mint. AMS' businesses are well-known for charging very high premiums on coins sold through their websites. New York Mint, for example, is selling the US Mint 2012 silver proof set for about $100. The same set can be purchased from the US Mint directly for about $68!

This month, Perth sold the US allocation of the five ounce proof silver dragons to AMS.

There are two potential reasons for the growing trend of regional lockouts. The first is that it's just a typical business decision by Perth; in other words, US dealers have been offering Perth big bucks to be exclusive distributors for Perth for a given coin series. In this case I don't have much more to say except I don't agree with Perth's business approach and hope they change their minds in the future and stop blocking US customers from purchasing their products. The other possibility, which I see as more likely, is that this is the latest in a series of experiments intended to control the outflow of Perth's coins to ensure Australian and other international customers aren't continually "shut out" by a tidal wave of US buyers. However, I feel like the region lockouts have gone a step too far in this direction.

It has been three days since the release of the five ounce proof silver dragons, and AMS so far has not put the coins up for sale at New York Mint, and has refused to provide any information about the coins to customers who called by phone, based on comments made on World Mint News Blog. There is a reasonable concern among US fans of Perth products that they will not be able to acquire the five ounce proof silver dragons except by paying excessively high premiums to New York Mint, which may take weeks to put the products up for sale, or by purchasing it from flippers on eBay. While Perth is not responsible for what AMS decides to do with the coins it bought, should AMS fail to distribute the coins in a timely manner or charge extremely high premiums for them, Perth will at least be partially blamed, whether it is fair or not.

UPDATE: Perth now says on its website that the five ounce proof silver dragon will go on sale on July 16th. This delay is most likely to give AMS time to get the coins graded, as graded coins can be sold for even higher premiums than "raw" coins. By way of comparison, Paradise Mint put the kookaburras up for sale almost immediately.

In my opinion, the Perth Mint has created a problem for itself similar to the problem the US Mint created for itself during the initial distribution of the 2010 America the Beautiful five ounce silver bullion coins. Readers may recall that the US Mint sold the 2010 AtB bullion coins to a select number of dealers, who promptly hiked the premiums and sold all the coins as a set. This caused a major PR problem for the Mint, and the aftereffects are still being felt today as this led to overproduction of five ounce AtB coins followed by very low demand for them.

My suggestion is this. Rather than "locking out" all US customers from purchasing their products, if Perth is worried about not enough Australian and other non-US customers being able to get the coins, they ought to allocate a specific number of coins for US customers and a specific number for their Australian and international customers. They could then sell this allocation on their website and when the US allocation runs out, that would be it. Should the "international" allocation fail to sell within several months, Perth could then perhaps consider allowing their US customers to purchase from that allocation as well to help get the coins to sell out. When combined with Perth's other approaches of the queue system and making the coins available at different times of day, I think this method would ensure the most customers who are "on the ball" will be able to get access to the coins they want.

The current approach of preventing US customers from buying their products and relying on third party distributors to handle their release seems to me to be a counterproductive approach which just unnecessarily antagonizes US buyers and forces them to pay higher premiums which customers in all other countries do not have to pay. As it currently stands, until AMS decides to sell its allocation, most US customers have no reasonable means of buying the five ounce proof silver dragons.

Above guest post courtesy of Doomberg.

9 comments:

  1. Simple solution, PM should just hold an open auction - dealers, retail buyers, everyone bids on equal terms. Highest prices gets the coins. All this regionalisation etc are just inefficient methods of dealing with the fact that you have more buyers than supply. Auctions are the way of dealing with this fairly and probably result in PM getting more money. Of course if they have a crappy coin, lack of bids will make it pretty obvious quickly, maybe PM afraid of auctions because market judges and no way to spin it or just let the product fade away?

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    1. It's an interesting idea, but one that I can see getting very messy. Also consider that the long term demand for these modern numismatic coins is from coin collectors, if they are muscled out of the market by speculators and retailers who bid higher to jack up the prices then the Perth Mint risks putting the collectors offside.

      Perth Mint products are hot stuff at the moment, but such popularity could shift rather quickly and there are some other mints putting out some great coins at the moment (New Zealand Mint for example). So I think they should tread very carefully with some of these changes being made.

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  2. Don't agree. By speculators you mean flippers. Well the point of an auction is to fully price the coin. Flippers only exists because mints fix a price below the actual market price, requiring quantity restrictions (eg regionalistion or allocations to markets/dealers) to control demand. Those that miss out then bid up secondary prices providing a market for flippers.

    I would think that in an open auction process the long term collectors would be able to outbid the flippers because they know they will hold them. Flippers on the other hand know that the auction process ensures those that really want the coin will get it, meaning the flipper has a much higher risk of not being able to flip the coin in the secondary market. Auction means no artificial quantity/access restrictions so isn't the logical conclusion there would not be any immediate short term flipping demand. So auctions would kill the flippers which are just a free market way of getting coins to those who want (and will pay) them the most? Really, all the non-auction process the mints use is doing is just giving away their profit to flippers - the end result is those that want the coin get it. It is really just a stupid way of selling a product which is in high demand.

    As to retailers, well the same logic applies, I mean can a retailer really outbid directly against a retail buyer, as the retailer has to add a margin. The only time retailers should be involved or "win" any volume in an action is if the coin is not in massive immediate demand by retail buyers, so they pick up the quantity not bid for by retail buyers to sell later (long term) into the retail market.

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  3. My issue with the auctioning idea is where the logic of it would lead. I think the end result would be the opposite of what you suggest.

    If the retailers and flippers caused the premiums to be raised to very high levels through auctions, "normal" collectors would stop buying the products. The purpose of "flipping" is to ultimately provide a high demand product (in this case a coin) to an "end buyer" (in this case a collector or maybe an investor) at a vastly inflated premium. If flippers caused every interesting Perth product to become very expensive, the interest of normal collectors in Perth's products would fall, and the end buyers would disappear.

    But would the "end buyers" come back once this process had worked itself out?

    Right now Perth has discovered a "sweet spot" in which they've got a perfect mix of several wildly popular coin series with limited mintages and relatively high premiums. If I were in their position, I would not want to upset this applecart. I believe an auction-only process would cause many of the less committed "end buyers" to drop off permanently, with no guarantee that they would come back.

    This was one of the reasons I tried to draw a comparison between the sale of the dragons and the sale of the America the Beautiful five ounce silver coins. Demand for the AtB series has collapsed, despite the US Mint repeatedly cutting prices and lowering the mintages of the coins to try to attract more buyers. Perth could end up in a similar situation if they take actions that shut out "end buyers" such as the regional lockouts or "auction only" sales.

    So far I think Perth's efforts to manage sales over the past year have been remarkably good; especially in comparison with the problems the US Mint has had. The problem is that Perth seems to be going too far with the regional lockouts.

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  4. The retailers and flippers aren't going to cause the premiums to be raised to very high levels because then they won't be able to on sell them to the end buyer.

    My view is that the auction process means that the end buyer is in charge because of the very fact that they are long term real buyers, not temporary holders who have to get rid of it quickly at a profit.

    In my view the auction process ultimately means retailers are cut out. Their only role is to buy at auction what the end buyers don't want for on sale to end buyers who for whatever reason don't/can't participate in the auction process.

    I don't ever see auctions happening because it will cut out the retailers - the mints will not disintermediate them.

    If you don't like auctions, then let me suggest an alternative which is similar. For known hot coins, why does any mint sell any of those coins to retailers at wholesale prices when it could sell all of them directly to the end buyer at full retail margin? It makes no economic sense, they are leaving huge money on the table. Can you explain that behaviour?

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    1. I guess it depends how they ran the auctions. If doing so for individual coins it would be an absolute mess to administer. If doing in bulk then I doubt many collectors would be in there bidding, hence putting their noses out of whack if they have to then buy from speculators who bought the coin in large quantities.

      As for offloading selective popular coins directly (the entire mintage), I think that would probably piss of the retailers. e.g. why should they be lumped with the duds while the popular coins are sold direct?

      I think the way things are done at the moment is probably the most efficient and fairest way of distribution. But do think selectively excluding US buyers from purchasing from the Mint direct is a poor move.

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  5. ...Readers may recall that the US Mint sold the 2010 AtB bullion coins to a select number of dealers, who promptly hiked the premiums and sold all the coins as a set. This caused a major PR problem for the Mint, and the aftereffects are still being felt today as this led to overproduction of five ounce AtB coins followed by the low supply of them.. What kind of play is this?

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  6. I think cutting out any buyers for any reason is wrong. If the sandwich shop tells you you can't buy all the ham ones because some else might want some you would laugh. And the Perth Mint will end up being laughed at.

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  7. I inquired about being able to import Perth Mint Gold to Uruguay. I was told early this year there was a AU$25k minimum. Before the beginning of this financial year the Perth Mint contacted me to say they had ceased selling to Uruguay.

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