March 2014, Week 4 Edition

Gold fell early last week based on two unexpected events: (1) The West's belief that Russia's accession of Crimea brought a peaceful end to what could have been a long, hot war between Ukraine and Russia. And (2) new Fed chairperson Janet Yellen said that she would likely raise interest rates in the spring of 2015 - sooner than most observers expected. Gold fell $23 on the Crimean news on Monday, then another $28 in the middle of the week, during the Federal Open Market Committee (FOMC) meeting, which ended with Yellen's surprising statement. Then, gold fell another $25 on Monday, March 24.

However, traders have clearly over-reacted, short-term, to Janet Yellen's squishy schedule for possibly raising short-term rates to 1% by the end of 2015. If gold can fall this sharply on the hint of a potential slight increase in interest rates 13 months from now, think how fast gold can snap back if the Fed stays accommodative and then finds a series of excuses not to raise rates in 2015. As for gold's other recent stimulus - the disruption in Ukraine - chances are good that this conflict has not been resolved. The gas pipelines and ample grain in Ukraine are too tempting a target for Vladimir Putin to ignore much longer.

We also have some welcome news of two former gold bears (or skeptics) turning bullish on CNBC:

Two Gold Skeptics on CNBC (Cramer & Gartman) Turn Positive

Clearly, many gold traders over-reacted to Yellen's interest rate announcement by selling off both bonds and gold in fear of higher interest rates - over a year from now! Jim Cramer of CNBC (formerly with Goldman Sachs) said on Friday that the market overreacted to Yellen, while ignoring the fundamentals. In gold's favor, Cramer said, "When you read the actual 10Ks of all the gold companies, they're all having trouble finding gold. The supply of gold is not coming out of the ground as it used to. Even Randgold, which has got the best holdings worldwide, they're having trouble producing a lot of gold."

Meanwhile, CNBC contributor and newsletter editor Dennis Gartman jettisoned his generally negative attitude toward gold over the last year, saying that gold will continue to rise "from the lower left to the upper right" (i.e., a bullish chart pattern). Gartman says that he has "quietly turned bullish on gold for a few reasons. Firstly, beginning five and six weeks ago we started to see a lot of the mining companies-even the largest- begin to curtail production. That's always a sign of an end of a bear market. When senior management at the largest gold mining firms throw their hands up in dismay and begin curtailing production, usually within weeks the lows are going to be found. Decision by committee is always that way. It's slow; it takes time; and it's always late." So both Dennis Gartman and Jim Cramer predict lower gold mining extraction this year, pushing gold up even if there is no change on the demand side.

Global Banks are More Positive about Gold than U.S. Investment Bankers

Jim Cramer's former employer, Goldman Sachs, reiterated their super-bearish year-end projection of $1,050 gold, but overseas banks are more experienced and realistic about gold's role in the global scene - as a safe haven, inflation hedge and "currency of choice" for endangered investors around the world.

Last week, for instance, Germany's Commerzbank reiterated their projection of $1400 gold this year. In addition, Japan's Nomura Securities just turned bullish on gold, upgrading its projection for 2014's average price from a bearish $1,138 to a slightly bullish $1,335. Nomura also sees gold reaching $1,460 next year. Citing a return of gold ETF buyers, Nomura analyst Tyler Broda (and six co-authors) wrote earlier this month: "Like a phoenix regenerating from its ashes, cyclical gold appears set to recover."

In addition, Hong Kong's HSBC (the former HongKong and Shanghai Banking Corporation) projected gold to reach $1,390 this year. James Steel, HSBC's chief commodities analyst, projects gold to remain in a fairly narrow trading range of $1,220 (the low, set in early January) to $1,390 an ounce by year's end. He says that "physical demand is bullish," citing "good demand in China - remarkably high - sluggish mine output, reduced scrap supplies, good coin and bar demand." Regarding last week's price decline, he added that "Gold prices are extremely sensitive to Fed policy and shifts in Fed policy."

Rare Coins and Other Luxuries Are Selling Better Than Ever

The stock market may be "flat," but the S&P 500 is at a lofty-enough level that people are feeling richer in their 401(k) plans and many of their mutual funds. Their home prices have likely recovered, and they feel more secure about their jobs. This has led many high-end investors to return to the "luxury" market, including certified rare coins. A report from CNBC calls some of these investments "treasure assets."

Some investors are taking profits in stocks in order to enjoy some of the finer things in life, such as art works, rare antiques, fine wines and historic U.S. coins. A survey by Barclays Wealth and Investment Management and Ledbury Research revealed that millionaire's spent just under 10% (about 9.6%) of their net worth in nonfinancial assets, including collectibles, in 2012 (the latest year with available statistics).

Most luxury items can be good investments and rewarding to own in their own right. Nobody looks at a stock certificate as a rewarding "treasure" in its own right, but rare art is rewarding to look at and often profitable to resell. The same is true with rare coins.

Factoid

Early military aircraft had throttles that had a ball on the end for easy grasping by the pilot. In order to go full throttle, the pilot had to push the throttle all the way forward into the wall of the instrument panel. Hence "balls to the wall" for going very fast and/or doing something very risky!

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