June 2014, Week 3 Edition

Gold continues to recover, up over $30 an ounce from its lows of $1244 in early June, closing above $1275 last Friday. Escalating tensions in Iraq and Ukraine pushed gold to a three-week high. Oil reached $107 a barrel, up from $94 at the start of the year. Due to ongoing tensions in Ukraine and the prospect of radical Muslim forces gaining control of Iraq, gold and silver rose while stocks fell last week. Platinum and palladium reached 2014 highs last week on concerns over the continuing strikes in South Africa, but both metals corrected on Friday, when it appeared that the 21-week mine strike may come to an end soon.

Silver Eagles Flying High

The silver American Eagle, Uncle Sam’s best-selling bullion coin, appears to be headed for unprecedented heights. As of May 20, sales of the one-ounce Silver Eagle during calendar year 2014 totaled 21.01 million coins. At that rate, sales for the entire year would easily exceed the all-time record high of 42,675,000 coins achieved in 2013.

Early-year sales were highest in March, when 5,354,000 examples were sold. That’s one of the strongest single-month figures in the history of the series, which is now in its 29th year.

The upward trend in Silver Eagle sales coincides with a period when silver has been trading for prices well below its 2011 high of not quite $50 an ounce. In that respect, it might well reflect a feeling that the metal is undervalued and therefore represents an excellent buying opportunity. In addition, there has been growing demand for uncirculated Silver Eagles certified in very high grades. Many coin buyers view these as collectibles, not just bullion coins, and pay significant premiums to obtain them.

Interest in Silver Eagles figures to get a further boost if the United States Mint adopts a new design for the coins’ reverse. Since the start of the series in 1986, the reverse has portrayed a heraldic eagle designed by John Mercanti, who was then an assistant sculptor-engraver at the Mint. Recently, the Citizens Coinage Advisory Committee, a public panel that provides the Mint with input on coinage design, recommended replacement of this artwork with a more dynamic naturalistic eagle.

To date, the Mint has made no announcement of any such change, but it did provide the Citizens Committee with dozens of potential new designs, from which the committee chose its favorite. This suggests that the Mint is amenable to the change.

Historically, design changes on regular U.S. coinage have stirred significant interest in the old and new issues. If such a reaction were to occur with new-look Silver Eagles, it might well translate into increased sales and values. There has been no discussion on changing the obverse of the coins, which duplicates the obverse of the Walking Liberty half dollar by sculptor-medalist Adolph A. Weinman, regarded by many collectors as single most beautiful U.S. silver coin.

The Asian Gold-Buying Revival Continues

Last week, we learned that ETF Securities’ Precious Metals Weekly calculated that China, India, and the world’s central banks are now buying about 90% of all the gold mined in the world so far this year, up from 80% last year. What has changed? In the last year, there were rumors of a slowdown in the Chinese economy. That did not materialize. China is still growing rapidly, lifting the buying power of the middle class gold buyers in China. Last Friday, we learned that retail sales rose 12.5% in May (year over year), while industrial output increased 8.8%. We also learned that China’s exports rose by 7% in May, while imports declined 1.6%, pushing its trade surplus up to $35.9 billion vs. expectations of only $23 billion.

The biggest change in Asia over the last year is the re-emergence of the Japanese economy. For over 20 years, since 1990, the Japanese economy either showed zero growth or very low gains each year. Then, in early 2013, Japan caught the “QE” bug with a vengeance, increasing its money supply at a far more rapid rate than any nation in Europe or North America. As a result, Japan just revised its first quarter GDP to a stunning (for them) 6.7% annual rate. Capital spending has risen by a phenomenal 34.2% in Japan in the last year. Bear in mind this is large and established economy with a very old population – few Japanese chose to build large families after World War II, so a very small working age population must support a very large retired population there. The key to Japan’s growth is easy money and a rapid rise in exports.

In India, official gold import figures for March were released last week, showing a rise of 88% from February’s totals. That might just be a seasonal anomaly, but a more encouraging sign is that we are now seeing increased gold buying activity due to the new Modi government’s first stage of gold import reforms. So far, the stories are sporadic and anecdotal, but the trend is encouraging. To begin with, gold premiums have shrunk dramatically, so gold looks suddenly affordable in India. In rupee terms, gold cost 2,539 rupees ($42.82) per gram last week, down from 2,830 ($47.72) a month ago. We are now hearing about housewives taking the gold plunge. One said she borrowed 50,000 rupees ($843) to buy gold, intending to “sell the gold whenever the price rises,” adding that a gold purchase “will never go waste.”

Put it all together, and in the future it may not matter much what U.S. investors do with gold, as long as Asia is buying more and more.

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