January 2015, Week 1 Edition

Gold closed 2014 in London at $1199.25 for a relatively “flat” year (-0.2%) in terms of the U.S. dollar, but gold rose strongly in terms of EVERY other major global currency (see the table, below). Gold is up in early 2015, rising above $1200 again, but this special edition of the Metals Market Report will focus on gold’s performance in terms of the dollar’s competing currencies over the last year and the last 15 years.

For the last 15 years, gold is up 314% vs. 199% for silver, 55% for the Dow Jones industrial average and 41% for the broader S&P 500 stock market index. Last year was a tale of two half-years: Gold enjoyed a strong first half, rising to $1385 during Russia’s forced annexation of Crimea last March. Gold then dipped, but remained over $1300 for most of June and July, before the dollar began rising sharply in the second half of 2014. Gold fell as low was $1132 in intra-day trading in early November, but gold far outperformed crude oil, which fell 46% for the full year of 2014, vs. gold’s modest 0.2% loss in 2014.

Gold Was the 2nd Best Currency in the World in 2014

Gold’s role is as a total “currency hedge,” not just an inflation hedge, deflation hedge, or dollar hedge. Investors in Russia, Europe, Asia, Latin America and all around the world are very thankful if they owned gold in 2014. In U.S. dollar terms, gold held its value in 2014, but it rose in all the other major currencies:

Data source: Wall Street Journal, January 2, 2015

From that list, you can see that the Russian ruble and Ukrainian hryvnia were the world’s sickest paper currencies last year. On the other extreme, the currencies in the two nations which buy the most gold each year – India and China – lost only about 2% to the U.S. dollar, so gold still seems affordable in both China and India. In the world’s most dominant currencies outside of the U.S. dollar – the Euro and the Japanese yen – gold gained a solid 13.4% and 13.5%, respectively last year. In two of the healthier European economies, Switzerland and Great Britain, gold rose 11.1% and 6.1%, respectively, in 2014.

Russia Added Gold to its Central Bank for the 8th Straight Month

The sharp decline of the Russian ruble explains why the Russian Central Bank keeps buying gold with depreciating paper currencies. In November, Russia bought another 600,000 ounces, bringing their 11-month total of 2014 gold purchases to 4.9 million ounces (152.4 metric tons). Russia has purchased gold for its central bank for eight straight months and 10 of the last 12 months. Russia has doubled its central bank gold holdings in the last 5-1/2 years. The hold 38.2 million gold ounces as of December 1, 2014.

Last month, some rumors circulated that Russia would sell some of its gold to shore up the ruble, but that turned out to be a false rumor. Instead, they raised the ruble’s interest rate to 17% (from 10%) in order to lure in more investors. Most investors refused to take the bait, so the ruble kept falling. On the first few trading days of 2015, the U.S. dollar index continued to soar and the Russian ruble continued to tumble.

Russian President Vladimir Putin has fallen on hard times, but he’s not about to throw good money (gold) after bad (the ruble). He told the media that selling Russian gold is not an option. He specifically told journalist Vyacheslav Terekhov that Russia’s central bank “should not hand out our gold and foreign currency reserves.” Instead, Russia has been selling its U.S. dollar holdings to buy more gold. In fact, Russia’s rapid accumulation of gold may lead toward a partial gold backing of the ruble in future years. (Specifically, Jim Rickards, a senior managing director at Tangent Capital, recently told CNBC that Russia will move to a gold-backed currency, but he believes that such a move is likely a long way off.)

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 on this issue 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 published in the industry, serves on industry boards and has been recognized by his peers. (They may not even have a resident numismatist!)

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