September 2014, Week 5 Edition
Gold stayed around $1220 all last week, but then it dipped down to $1215 on Friday. Early this week, gold showed minor strength over the riots in Hong Kong, but the big story on gold this year continues to be how much gold’s latest moves represent a mirror image of the U.S. dollar.
Gold’s Price in 2014 Has Been the Mirror Image of the U.S. Dollar
The dollar was weak in the first half of 2014, when gold was rising, but the dollar has been super strong in the third quarter, rising about 8%, causing a sharp decline in the price of gold in terms of the dollar. This chart from Aden Research reflects the inverse relationship between gold and the U.S. dollar:
First, notice the surge in gold prices from January to March, mirrored by the dollar decline during the same months. During those months, Russia forced a referendum on the independence of Crimea.
The second quarter was volatile for gold and the dollar, with a saw-tooth pattern in search of a trend, but the third quarter showed a sharp increase in the dollar and an equivalent decline in the gold price.
The dollar rallied as a haven of safety at the start of the ISIS wars in Syria and Iraq. However, if the dollar reverts to its early-2014 flat or weak trend, we are likely to see higher gold prices next year.
The key, according to the Adens, is for gold to stay above its previous low of $1193, set last December. If that bottom holds, then gold is forming a strong base for later increases. If that figure fails to hold, the Adens say, we may see some further declines.
However, that $1193 test price for gold depends in large part upon the future health of the U.S. dollar. If the dollar continues to rise, then gold can fall to $1193 without being weak in other currencies.
The Fear of Rising Interest Rates is…WAY Over-rated!
(Historically, Gold Often RISES During Times of Rising Rates)
Two weeks ago, we showed how gold rose rapidly – from $385 to $725 – the last time the Federal Reserve raised the Fed Funds rate. From a base of 1% in June of 2004, the Fed raised the Fed Funds rate to 5% just two years later. In those two years gold nearly doubled and the U.S. dollar was in a downtrend!
This same thing happened in late 1979, during gold’s strongest historical surge. In 1979, the Fed Funds rate began the year at 10%, but that rate doubled between August 1979 and February 1980, the same six months in which gold soared from under $300 to over $800. First, the Fed Funds rate rose from 10% to 11% in August 1979, then to 15% in late October, 1979. The Fed Funds shot up to 20% in February 1980. While interest rates were doubling, gold rose from $283 on August 6, 1979 to $850 on January 21, 1980.
This history was quietly repeated in 1994, when the Fed doubled the Fed Funds rate from 3% to 6% while gold gently rose from $370 in April 1994 to $395 in April 1995 – no great rise, but no decline, either.
The point is that most stock market analysts are overly worried about a small increase in the Fed Funds rate next year. Their fears are currently dominating the gold market, but gold will have the final answer. When the Fed finally raises interest rates, the world may be surprised to see gold rise instead of fall.
Federal Marshals Chase Famed Treasure Hunter
Tommy Thompson was the toast of treasure hunters and the coin world in October 1988 when he discovered the stunning lost treasure of the SS Central America, a ship that went down in a storm off the South Carolina coast in 1857 with millions of dollars in gold on board. Now Thompson is a man on the lam with U.S. Marshals on his tail.
Thompson’s elation at finding the rich treasure was short-lived as challengers came out of the woodwork to claim a piece of the pie. Long and arduous legal battles followed. In 1996, Thomson’s company was awarded 92% ownership of the treasure find, with the rest divided among some of the insurers of the ship.
His legal troubles weren’t over, though, as investors in his company and even members of his crew claimed they hadn’t been paid shares that were promised them. So he disappeared.
It’s not clear exactly when he dropped out of sight. What is known is that on August 13, 2012, he failed to appear at a hearing in the court battles, and a federal judge found him in contempt and issued an arrest warrant. In a court deposition, maintenance worker James Kennedy said that not long after that he went inside the Florida mansion where Thompson lived and found pre-paid disposable cellphones and bank wraps for $10,000 bills, along with a book called “How to Live Your Life Invisible.”
Gil Kirk, a former director of one of Thompson's companies who says he put $1.8 million of his money into the treasure hunt and has not been repaid but still supports Thompson, commented that Thompson’s dream became his doom. “Tommy used the word, what's the word?” Kirk said.“Plague of the gold.”
Meanwhile, salvage operations continue off the coast of South Carolina at wreck site of the SS Central America. Remotely operated vehicle dives, using more modern equipment, have recovered more gold and silver coins. The recovery and sale of more Type I $20 Liberty gold coins from this shipwreck should boost interest in all types of $20 Liberties in the near future.
My new book on Type III Double Eagles, to be released in early 2015, should also increase demand for coins in this series. In 2000 my first edition about this popular series received the Numismatic Literary Guild Investment Book of the Year Award further boosting interest in double eagles.
