September 2015 – Week 1 Edition

Gold rose $35 in August, a rise of more than 3%, while the Dow Jones industrial index fell by 6.6%. In addition, the U.S. dollar fell about 1% in August.  (Last week, the dollar rose sharply but for the month of August, the dollar fell 1% and the euro rose from $1.10 to $1.12.)  Most other commodities also fell in August (silver was down 1%), making gold the clear winner among various asset classes during August.  Some gold investors expected gold to rise faster during a stock market decline – like last week’s volatile crash and rise – but sometimes gold can protect portfolios by being the most stable investment available.

With Global Crises Exploding – Why Isn’t Gold Soaring?

Last Monday, the U.S. stock market opened with the sharpest decline since 1987, as the Dow index opened down 1089 points. According to JP Morgan Chase, writing last Tuesday, “a negative move of this magnitude has only been seen on two prior occasions since 1900 – on October 19, 1987 (Black Monday) and on May 13-14, 1940, when Germany invaded France” (at the start of World War II).  Gold rose to $1166.50 on the London afternoon setting last Monday (August 24), but then it fell back to the $1130s.

First off, the stock market recovered rather rapidly in the second half of last week.  Secondly, there was no extremely serious global crisis going on, only a sharp market correction in China, which was overdue since the Chinese market had risen so fast.  China has finally stopped trying to manipulate its market up, so it will likely settle lower before rising, but the Chinese economy is not slowing to a standstill.  It is still growing, and so is India, so there is some hope that gold demand can continue rising in China and India.

In the grand scheme of things, there is no major hot war going on, only skirmishes. There are financial crises brewing in places like Greece and Puerto Rico, but no imminent financial crisis dominating the headlines in major nations, so gold’s stable price is telling us that global conditions aren’t in crisis mode.

Low Gold Prices Lead to Mine Closings

According to Metals Focus, the amount of newly-mined gold will decline this year after peaking in 2014.  Production is now projected to drop 18% by 2020.  This may not have an immediate effect on gold prices this year, but the long-term cure for low gold prices is…low gold prices. When mines close due to a lack of profitability in their properties, there will be less and less new gold coming into market.  Then, all it takes is a modest rise in demand to get gold prices rising again.

Gold mining output per year rose 24% in the last decade, rising from 2,511 metric tons in 2004 to a record 3,114 metric tons in 2014 as gold mining companies brought more marginal properties on line, in belief that gold would keep rising to $2,000 and beyond. But with gold down 40% from its peak of more than $1,900 per ounce in 2011, many mines are no longer profitable.  Gold hit a five-year low of $1,077 on July 24 this year and it has since moved back above $1,130, but that’s still far below the median break-even price for mines of $1,200, according to James Sutton of JPMorgan Chase’s Natural Resources Fund.

Bloomberg Intelligence adds that the 15 largest gold mining companies have lost 45% of their profit margin since 2011 while doubling their levels of debt to about $34.7 billion.  The leading gold mining shares are off 80% in the last four years – about double the decline in gold bullion – since gold mining shares tend to leverage the price of gold, up or down.  In the last year (since September 1, 2014), gold is down about 12% in U.S. dollar terms, but the XAU gold/silver mining share index is down 51%.  Gold bullion and rare coins are clearly superior to gold mining shares during a time of depressed gold prices.

Powerful Demand Creates Shortages at Major Global Mints

Phone calls from new and established customers are asking dealers how long (and for how much of a premium) they must wait for delivery of some gold and silver coins.  The U.S. Mint and/or the Royal Canadian Mint have slowed down delivery, occasionally stopping delivery altogether, or they have had to put major dealers on an allocation basis as they search for more raw silver and gold blanks to manufacture new coins.  Many dealer’s phones are ringing off the hook. The surge in demand for hard-to-get bullion coins is now creating a shortage of low-premium numismatic coins, like $20 gold Double Eagles or common-date Morgan and Peace silver dollars.  Even “junk” silver coins are now getting harder to get. 

Dealers who haven’t stockpiled coins in advance are in a bind.  If they merely “buy to order,” their customers may experience long waits and then take what’s “left over” after the more established buyers have stockpiled the best products. First-time customers need to know that this unusually high demand for many physical bullion products (including coins and bars) this summer has created in some cases higher premiums over precious metals prices and often delayed deliveries for many products.  Delayed delivery in normal times is a warning sign that a vendor may not be reputable.  Be sure and check out any vendor you transact with for their reputation in the industry.  Customers who demand bullion at any price may want to discuss with their broker which products may provide better value.

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