June 2015 – Week 3 Edition

Gold climbed gradually last week, from $1164 to $1173 on Monday and a peak of $1189 Wednesday (London pm fix) before settling at $1182 on Friday.  Silver declined from $16.15 down to $16.01, moving opposite to gold’s trend, which usually signals the fact that gold is rising due to some geopolitical threat or a flow of funds into gold as a safety net. Year-to-date, silver is up 0.3% and gold is down 1.4% in U.S. dollar terms, but gold and many other commodities are rising in terms of the euro and other currencies.

Wall Street Journal Changes its Tune to Favor Gold

We’ve often tweaked the editors of the Wall Street Journal for their unfair coverage of gold.  After all, they cater to the “paper money” community – the holders of stocks, bonds, cash and currencies.  Gold provides an unwanted reminder that paper money has no intrinsic value.  Paper relies on the confidence in the holder of that paper that some other buyer will step in to offer more money for that paper at a later date.  Therefore, the Journal’s reviews of the gold market have been “catty” at worst or “spotty” at best.

Still, the Journal needs to fill its book-length “news hole” every day with article of interest to a wide range of readers, so when gold goes up or down there is generally an article by Tatyana Shumsky, their gold reporter, on why gold went up or down the previous day.  The Journal’s gold review is usually filled with quotations from market makers and portfolio managers interested (or not interested) in buying gold. 

One Journal headline in early June caught our eye: “Gold Gains Allure as U.S. Economy Stumbles.”  This article was another classic “bad news for the world is good news for gold” story, which is getting rather old, since gold is no longer just a crisis hedge or an inflation hedge.  It is also a “luxury purchase” (which requires affluent investors) and a currency hedge – a superior competitor to cash more than just stocks. 

In this article, Shumsky begins by saying, “Some investors who aren’t sold on the strength of the U.S. economic recovery are taking a shine to gold. After shunning the precious metal for years in favor of bonds and stocks, which often pay a steady income, investors are returning to the gold market to safeguard their wealth. Lofty valuations in stocks and bonds, which have rallied in recent years while gold prices slumped, also are prompting some investors to revisit gold amid fears of a downdraft in these markets.” Acknowledging inflation risks, she adds “Some traders also are pointing to easy money policies in Europe, which have pushed deflation worries off the table, and to similar efforts by other global central banks that could ultimately reignite inflation. These traders are buying gold in the hope it will keep its value better than other assets if consumer prices surge or if currencies lose their purchasing power.”

As to the myth that gold will fall once interest rates rise, she writes: “Gold prices already reflect the likelihood of a rate increase—or two—in coming months, say investors who are skeptical that global growth will pick up enough to warrant steep tightening of U.S. monetary policy.” She quotes Michael Tiedemann, chief investment officer for the $9.5 billion Tiedemann Wealth Management funds, who said “Gold as a flight-to-quality asset holds as much validity for us today as it did in 2005 and 2006, when we first started buying it.” Tiedermann said he recently sold stocks to bring gold up to 3% of his portfolio.

The Wall Street Journal also reported recently that China’s gold consumption for the first three months of 2015 rose 1.1% versus the same quarter in 2014, according to China Gold Association president Song Xin.  This is a small gain but a dramatic turnaround from recent declines.  This is important since China and India account for about half of total global gold consumption, according to the World Gold Council. China is the biggest gold producer and the biggest gold consumer (importer). Any slowdown in China’s economy incites fears that Chinese gold demand would retreat, so a 1.1% increase is very good news.

Middle Eastern Money May Move into Gold Soon

Last week, Peter Cooper, the publisher and editor of ArabianMoney.net, warned that all the new liquidity in global central banks will cause inflation, so “buying gold to hedge against the very real possibility that they lose control is going to be the next big thing.” In the Middle East he is widely followed. Cooper points to money supply figures for Europe and the U.S. that reveal the underlying cause of the inflation headed our way.  He cited “M1 money” (the narrowest form of money, generally cash and checking accounts) is expanding in the Euro-zone “at the phenomenal rate of an annualized 16.2 percent for the past six months. The wider measure of the money supply M3 is growing by the fastest rate since 2008, up 8.4 percent in the same period…The Federal Reserve has quadrupled its balance sheet since the global financial crisis, pulling and pulling on a piece of string that never seemed to break. Now the brick on the end of that string may be about to fly into its face as M3 growth has returned to post-war averages, up around eight percent so far in 2015.” (M3 growth is no longer calculated directly by the Federal Reserve, but it represents the broadest definition of money.)

He also argues that global central banks are loading up on gold because they see inflation coming: “Why are global central banks buying so much gold unless they still fear inflation? The World Gold Council estimates that 120 tonnes of gold were added to global central bank reserves in the first quarter of this year and that’s a whole lot more than they used to buy.  In fact even since 2010 the central banks have increased their share of global gold demand from just 2% to 14% last year…. For central banks, gold is the classic hedge against monetary instability and against inflation, that is to say unwanted devaluation.”

Four Reasons Why We Could see a New Bull Market in Rare Coins in the Next 18 Months (Revisited)

I have been following the coin market since I was a young boy and I can tell you that there have been at least one – and sometimes TWO – significant bull markets in rare coins every decade since the 1960s.  By “significant,” I mean gains of 100% to 500% or more within a year or two.  I feel the odds are increasingly in our favor for seeing another bull market in 2015 or 2016, based on these four potentially powerful new trends:

#1: Gold’s basic supply and demand fundamentals, both domestically and globally, are improving.  On the supply side, many analysts are pointing to 2014 as the year of “peak gold production,” meaning that the annual supply of newly-mined gold will begin to shrink this year.  Meanwhile, demand is increasing in such gold-hungry nations as China, India and Russia. Russia bought 1.3 million Troy ounces in the last two months.  India is also stepping up gold demand, importing 85 metric tons of gold in April, up 78% from April of 2014. Gold demand in Europe was up 16% in the first quarter. In this scenario of gradual decline in supply and an increase in global demand, gold prices will eventually rise. Then, leveraged hedge funds and other U.S. trend followers will likely get back into gold, pushing gold higher.  By using gold ETFs, Wall Street can leverage the price of gold higher.  When gold prices finally break out (say, above $1,400) more customers reply to bullion-oriented advertising, which leads many of these new investors into rare coins as a superior long-term investment.

#2: The stock market will probably flatten out or decline slightly.  Stocks have set numerous all-time highs in recent weeks, despite decaying fundamentals in such traditional valuation measures as price-to-earnings ratio and price-to-sales ratio.  Earnings have been flat, but stock prices have gone up.  The economy is weak, with a flat Gross Domestic Product (GDP) last quarter, and a weak current quarter, which many analysts say could turn negative.  With super-low interest rates, bonds and bank deposits have failed to return any meaningful income to investors, so millions have turned to the “only game in town,” stocks.  There has not been a 10% correction in stocks for over three years now, so a meaningful correction is long overdue.  When that begins, investment capital generally flows to safer alternatives, such as gold, silver, commodities and other tangible investments.

#3: The advance of ISIS in the Middle East and other global threats, including Russia’s potential annexation of Ukraine, could cause a flight to safety in those regions and neighboring parts of the world, including most of Asia and Europe.  With the U.S. withdrawal from Iraq, the power vacuum is being filled with the most radical political force the region has ever seen.  With few real solutions to stop ISIS currently, they may take over Iraq and Syria, with other national dominoes to fall later.  Gold’s biggest bull markets (1976-80 and 2003-2008) came during times of escalating violence in the Middle East – first, when Iran took 53 Americans hostage in 1978 and then Russia invaded Afghanistan (1979), followed by another bull market during Gulf War II, from 2003 to 2011.  It’s no coincidence that we also enjoyed big gains in the rare coin market during those times of rising Mideast unrest.

#4: The dollar can’t continue to rise against the euro and other currencies.  The dollar may have already peaked in mid-March of this year, but even if the dollar rallies for a few more months, it can’t rally for an extended period of time since the dollar is merely the “least weak” of many competing paper currencies. The euro and Japanese yen are currently sinking because their programs of quantitative easing (QE, or money creation), are proceeding at a far faster pace than the U.S. Federal Reverse created money in its various QE programs from 2008 through 2014.  The Federal Reserve keeps delaying any increase in short-term interest rates.  Since the U.S. and Europe offer no meaningful short-term interest rates to member banks, there is no incentive to hold cash for income, giving gold an “even playing field” against most of the world’s currencies.

Gold has been rising in terms of most global currencies – all except the recently-strong U.S. dollar.  Once the dollar falls, or just stops gaining ground to the euro, then gold should begin rising in terms of the dollar, too. 

For these and other reasons, I see more money coming back into the coin market.  The rare coin market is a very narrow market with a limited supply of available products.  Prices and availability are attractive now, but they will not remain attractive forever.  Once prices start rising, new supplies often dry up.  Wise investors will get on board now. 

Rare coins combine the investment virtues of quality and rarity.  Our advice is to insist on coins certified by PCGS and NGC. Only buy them from a true expert who knows how to grade and authenticate rare coins and is recognized by his peers with awards and industry leadership positions.   

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