July 2015 – Week 4 Edition

Gold suffered a “bear attack” in China last Monday, July 20, when Chinese traders pushed gold down to $1080 before buyers moved in.  A huge wave of selling (representing 33 metric tons of gold in the most actively-traded futures contract) traded hands in two minutes, sending gold down $40 in minutes.  There was a holiday in Japan and it was late Sunday in New York, so there was no immediate buying.  After that, gold drifted above and below the $1100 line all week long, touching $1076 on Thursday in London before closing the week (in Asian trading) at $1098.  There are many reasons cited for the selloff in China, but most likely China’s stock market crash caused some investors to sell gold to meet margin calls.

Gold Coin Demand Rises after the Latest “Bear Raid”

Even though the gold bears unloaded (or sold short) their paper gold investments (like gold ETFs and futures contracts), the physical demand for gold coins and bars keeps growing.   Gold’s sudden drop below $1100 fueled a major rush of demand for gold coins and bars in several markets around the world, including China, India, Europe, Australia, and the U.S.  The Wall Street Journal reported: “Gold’s plunge to five-year lows this week has prompted a swift rise in demand from jewelry retailers in China and India, the world’s top consumers of gold, leading to a doubling of premiums paid on physical gold.” 

Even though Chinese traders sold their gold futures contracts, Alex Cheung, the manager at Wo Shing Goldsmith, one of Hong Kong’s oldest gold jewelry retailers, said that demand for gold “shot up” last week. “Our sales are up by 20% to 30% compared to average sales in previous months.” A jeweler in India agreed: “Demand has picked up noticeably as the common man thinks prices have bottomed out.”           

In the U.S., Reuters reported that the U.S. Mint has sold 110,000 Gold Eagle coins so far in July (through July 22), vs. only 21,500 ounces sold in May and 76,000 in June. July’s totals already represent the best month for gold coin sales in over two years, with another few days to add to those totals. As for silver, the U.S. Mint ran out of Silver Eagles early in July and suspended sales on July 8 because of high demand. At the end of last week, the Mint announced that they would resume American Silver Eagle coin sales in the last week of July, but only on an allocation basis to authorized dealers, according to U.S. Mint officials. 

Australia’s Perth Mint reported the same kind of increase. Goldseek.com reported that Ron Currie, sales and marketing director for the Perth Mint, said sales in June were up 37% year-on-year and “sales in July already matched that level earlier this week and appear to be gaining momentum,” so smart physical gold buyers know a bargain price when they see it, while paper traders follow the momentum and sell on dips. 

Marketwatch quoted a Sharps Pixley analyst who said that “we have a peculiar world where the physical market is seeing very strong buying, but a large leveraged speculator is selling at these prices.”  

New Central Bank Buying in China and Russia

 Central banks are also net gold buyers.  The Central Bank of the Russian Federation bought another 800,000 Troy ounces – about 25 metric tons – in June, bringing their total holdings to 41 million ounces (1275 tons), worth around $45 billion at $1100 per ounce.  Russia has tripled its gold holdings since 2005. For all of last year, Russia bought over 5.5 million ounces (173 tons), so Russia could surpass last year’s totals if the huge June purchase is indicative of their increased focus on gold vs. eroding paper currencies.  

China seldom reveals how much central bank gold they own, but last week China gave us a new figure for their gold holdings first time in over six years.  In April of 2009, China revealed that they owned 1054 metric tons of gold.  Last week, they revealed that they owned 1658 tons as of June 30, 2015, representing average annual purchases of around 100 metric tons per year since 2009.  (Most analysts had expected China to announce holdings over 2000 tons.) China’s total foreign exchange reserves have grown faster, so gold’s percentage of their total central bank holdings is now only 1.65%, down from 1.8% six years ago.  Still, this makes China the sixth largest official sector gold holder, and Russia is right behind, at #7. 

The Establishment Believes that Gold is a “Pet Rock”

The day before the big gold selloff on July 20, The Wall Street Journal printed a negative article about gold, titled “Let’s Get Real About Gold: It’s a Pet Rock” (a page 1 Business & Finance headline in the weekend editor of the Wall Street Journal for July 18-19 by the “Intelligent Investor,” Jason Zweig). 

This article reflected the current Wall Street bias against gold, and Jason Zweig looked very smart when gold sold off sharply the next Monday morning.  Still, even though gold is off in U.S. dollar terms so far in 2015, it is up for the year-to-date in terms of the euro, the Canadian dollar and the Australian dollar.

According to Frank Holmes, CEO of the U.S. Global Investors funds, the largest gold futures investors, including many huge hedge funds, have sliced their bullish position by 55%, which is “more than 14 million ounces below levels hit in January this year, when gold reached its 2015 peak. The net long positioning is also the lowest since October 2006 when gold was worth less than $600 an ounce.”

If the dollar suddenly turns down, we could see a strong rally in gold, which could bring Wall Street back on board.  Then the “pet rock” stories will suddenly morph into “golden profits” stories once again. 

The Value of Money

There’s a new “must see” in Washington, DC for anyone interested in coins, currency or the history of money.  The Smithsonian’s National Museum of American History has a new Gallery of Numismatics, and my wife, Karen, and I were invited guests at the recent inaugural exhibition of its remarkable display, “The Value of Money.”

The museum’s space designated for coin exhibits now has been enlarged from 300 square feet to an impressive 1,000 square feet.  You enter the exhibit area through a replica of a huge – and heavy!! – vault door.  Inside, there are more than 400 eye-opening objects from the National Numismatic Collection on display. Among the many highlights are a 1933 Double Eagle; a personal check signed in 1813 by President James Madison; and a Series 1934 $100,000 denomination note.  Among the items showing the long history of money are an ancient silver Decadrachm from Syracuse Sicily dating back to 465 B.C. and a Ming Dynasty note from 14th century China. 

During a reception at the exhibition I had the opportunity to talk with U.S. Treasurer Rosie Rios.  Her “autograph” is in your pocket, purse or wallet; her facsimile signature has appeared on our paper money since 2010.  I also met with long-time friend and former Louisiana Congressman Jimmy Hayes.  He’s a coin collector and an important friend to the numismatic hobby and profession when he was in the U.S. House and now as a consultant and lobbyist.  There also were meetings with Smithsonian executives and with Kathy McFadden, Executive Director of ICTA, the Industry Council For Tangible Assets.  ICTA is a crucially important organization that fights daily nationwide to protect your best interests in the buying and selling of rare coins and precious metals. I’ve been on ICTA’s Board of Directors for more than 20 years. 

It was a memorable day of money and movers ‘n’ shakers in Washington!

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