Metals Market Report Archive
Metals Market Report 09-10-2014

The Mike Fuljenz Metals Market Report

September 2014, Week 2 Edition

Gold fell to $1250 on Monday, on a suddenly stronger dollar. The dollar index is up 4% in the last two months, and the dollar is up 7% to the euro since May. The euro has fallen from $1.39 in May to $1.29 this week. This means that gold is rising in euro terms, even while it is falling in dollar terms. Since May, gold is up almost 5% in euro terms, from 935 to 980 euros per ounce (as of last Friday), while gold fell about 3% in dollar terms, from $1300 down to $1260. But can such a divergence last much longer?

Why the U.S. Dollar is (Temporarily) Surging

The U.S. dollar is rising because the U.S. Federal Reserve is winding down quantitative easing (QE), while the European Central Bank (ECB) has begun a seemingly desperate attempt to stop deflation by charging banks negative interest rates (-0.2%) for overnight bank deposits, while lowering the key euro short-term interest rate to 0.05%. When currency and bond investors look at their global choices, they see 10-year German euro-bonds (“bunds”) yielding 0.9%, while the 10-year U.S. Treasury note yields 2.4%, so currency and bond investors naturally sell euros and buy dollars, pushing up the U.S. dollar. The dollar will likely continue to rise, short-term, simply because global investors seek higher real yields.

Longer-term, however, the dollar will fall, along with most other world currencies, as most central banks continue to print more money and keep short-term interest rates ultra-low to prevent the pain of paying higher interest charges on their runaway government debts. Central banks are continuing to buy gold at near-record annual rates, so they are voting more for gold as they continue to debase their currencies.

The World is Gradually Moving Away from the Dollar

The euro has fallen dramatically to the dollar, but those are not the only two choices available to investors and traders. With the emergence of China as a superpower (and Russia emerging as a newly belligerent superpower), the Chinese yuan is gaining favor in many major trade treaties. For instance, China and the Swiss central bank recently signed a currency swap agreement worth 150 billion yuan ($24.3 billion), to facilitate trade between the two nations. Also, the Shanghai Gold Exchange, opening later this month, will trade gold contracts exclusively in the Chinese yuan, which is actually appreciating (albeit slightly) in dollar terms, rising from $0.16 in June to $0.162, even while the euro has been sinking to the dollar.

Meanwhile, Russia announced last month that their giant oil company, Gazprom, will only accept Russian rubles and Chinese yuan for their crude oil deliveries. While the West imposes sanctions against Russia for its intervention in Ukraine, Russia will continue to punish the West by moving away from the U.S. dollar and the euro. There are usually no winners in such trade wars, except those who buy gold.

Taco Bell Promotes Morgan Silver Dollars

The text of the latest Taco Bell TV ad is a perfect educational tool for rare coin investors. The ad shows a grandfather proudly telling his grandson that “this silver dollar has been in our family for generations.” He tells the wide-eyed boy that “I had it with me the night I won the heart of your grandmother” (that would have been around the 1950s, when silver was still common in U.S. coinage). He goes on to say the dollar has a small bullet hole in it, claiming that it saved his life during a “construction riot” in the 1960s.

The grandfather is about to make the historic transfer of family wealth from one generation to the next when he sees a Taco Bell sign advertising their $1 menu items, so he interrupts himself in mid-sentence: “And now I want you to have … [sees the $1 menu sign] … oh, never mind.” The ad concludes that “no dollar is safe.” A more accurate lesson, of course, would be “Gresham’s Law” (named for Henry VIII’s finance minister), which says “bad money drives out good.” In this case, grandpa would spend his paper dollars for tacos and save the silver dollar, but Taco Bell pays for the ad, so grandpa wastes his heirloom.

A Morgan silver dollar is worth roughly $15 for its melt value alone, and far more for its condition and rarity, so grandpa could treat over a dozen Taco Bell customers to a $1 meal by using his silver dollar!


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