December 2014, Week 5 Edition

Gold closed 2014 around $1200 for a relatively “flat” year in terms of the U.S. dollar, but gold rose strongly in terms of many other global currencies. Looking back at the year just past, gold had a strong first half, rising to $1385 during Russia’s forced annexation of Crimea in March. Gold then dipped, but it remained over $1300 for most of June and July, before the dollar began rising sharply in the second half of 2014. Gold went down to as low was $1132 in intra-day trading in early November, but gold was one of the best-performing commodities in 2014. For instance, crude oil fell by 50% in six months, from $107 in late June to $53.50 at year’s end. By comparison, gold fell less than 10% in the second half of 2014. Gold’s fundamentals are still strong, so any decline in the dollar in 2015 should send gold prices up sharply.

Check the Credentials of any “Cash for Gold” or “Cold-Call” Telemarketers

The State of New Jersey recently examined 71 “cash for gold” shops in six cities in that state, handing out nearly 10,000 civil citations for violation of consumer protection laws. “Cash for gold” ads often claim “We pay top dollar for your gold!” but they often end up paying “bottom dollar” for unsuspecting clients and customers who turn over their gold jewelry and coins for appraisal. In many cases, according to New Jersey inspectors, they paid “pennies on the dollar” for gold, racking up huge profits on the bullion melt prices.

Steve Lee, acting director of the New Jersey Division of Consumer Affairs said that, “Our intent is not to drive these companies out of business, but it’s to bring them into full compliance with the law.”

Whenever you are contacted by a “cold call” sales representative, or feel tempted to visit a “cash for gold” storefront shop, ask to see their business credentials, including Better Business Bureau ratings and their required state and local business registration papers. Make sure that whoever you do business with is lawfully registered. Ask to see their Web site and examine their city and state registration there.

Our company is registered with the city and state, and we post the numbers prominently on our website. I have been interviewed by CBS, the LA Times and have won national awards reporting on dealer fraud from the Numismatic Literary Guild and the Press Club of Southeast Texas. Ask if their numismatist is widely known in the industry, serves on industry boards and has been recognized by his peers. (They may not even have a resident numismatist!)

Gold is Far More than an Inflation Hedge

Last week, the Consumer Price Index (CPI) came out at -0.3%, reflecting a 3.6% annual rate of deflation. This was the largest monthly decline since December of 2008, during the worst financial crisis of the last 80 years. The biggest factor was a 6.6% drop in gasoline prices. Excluding food and energy, however, the CPI rose 0.1%. In the past 12 months, the CPI has risen 1.3%, so slow inflation is still the norm.

One of the reasons gold has declined this year is that there is little or no inflation in sight. As John Waggoner of USA Today wrote last month (November 21), “Gold has a reputation as an inflation fighter, but the data really don’t support that. From 1980 through the end of October, consumer prices have gained 209% while gold has risen 129%. In fact, gold’s performance bears little correlation to inflation. From 1980 through July 1999, the price of gold swooned 50%, to $255 an ounce, while inflation rose 117%. And during the relatively benign period from July 1999 to August 2011, gold soared….”

As I said at the time, he cherry-picked his dates to make his case. He started in 1980, a peak year for gold. If he had gone back to the full century of currency debasement since the Federal Reserve was born, he could have measured gold vs. inflation after the government’s major changes in valuing gold vs. paper:

• In 1913, the Federal Reserve was born and so was the Consumer Price Index (CPI), so we can see the results of gold vs. inflation for a full century. Since 1913, gold is up 57-fold (from $20.67 to $1180), while the CPI is up merely 23-fold, so gold has grown 2-1/2 times the rate of inflation.
• In 1933, FDR forced the sale of privately-held gold and then he revised the gold price to $35 per ounce in early 1934. The CPI is up 18-fold since 1933, but gold is up 34-fold from $35 an ounce.
• In August, 1971, President Nixon closed the gold window. Since then, CPI inflation is up 483%, while gold is up 3,271%, so gold has risen almost seven times faster than inflation since 1971.

It’s a mistake to think that gold tracks inflation each year, or month, or even decade. Gold does not track inflation that closely. Gold is subject to the buying and selling of market traders, like any investment, but over time gold has proven itself to be an inflation hedge AND a deflation hedge, i.e., a currency hedge.

The U.S. Mint Reports Record Silver Eagle Demand

Despite this year’s decline in silver, physical demand has soared to new record highs above 43 million ounces of Silver Eagle coins, as of December 11, with 20 more days of demand left to report in 2014.

Since the Silver Eagle was launched in 1986, the Mint has sold 401.4 million Silver Eagles and 20.6 million ounces of Gold Eagles. The volume of Silver Eagle sales has picked up strongly in the last six years, with more sales of Silver Eagle coins from 2009 to 2014 than from 1986 through 2008.

India is Back in the Gold Game – Big Time

India imported 150 metric tons of gold in November, according to Indian Ministry of Commerce and Industry, a 571% increase over November of 2013, when import restrictions were in full force.

*A tonne (or metric ton) is one million grams, or 32,150 Troy ounces (or 2,204.6 pounds)

The latest surge came after India relaxed the “80/20” rule (dealers had to export 20% of what they imported). That law change came just in time for India’s major festival and wedding season demand. After a year of shortages and smuggling, India is now awash in gold. Three gold loan companies in state of Kerala now hold more gold than some of the world’s richest central banks. India accounts for approximately 30% of the global demand for gold, so it’s good to see them back in the gold game.

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