November 2015 – Week 2 Edition

Gold fell from $1108 to $1085 in a few minutes last Friday morning after the monthly jobs report came out showing a robust 271,000 new jobs created in October, thereby giving the Federal Reserve the needed ammunition they can cite to raise short-term interest rates by 0.25% at their next Federal Open Market Committee (FOMC) meeting in mid-December.  This news lifted the U.S. dollar and depressed gold in U.S. dollar terms. Gold’s sharp decline may be a gross over-reaction, but the assumption of the press and most mainstream investors is that dollar-based interest-bearing instruments will outperform gold as rates rise. 

A Quick Rehearsal of the Positive Case for Gold in This Environment

We can’t control the reactions of short-term traders, who sold their gold ETFs last Friday, but we can take a longer look at the fundamentals and see why gold will likely recover from its recent low prices.

#1: Seasonal Trends: September through February is best time of year for gold due to the fabrication of gold jewelry for a series of gift-giving holidays around the world, starting with Diwali in India, which falls on November 11 this year.  Then comes Christmas, China’s New Year (falling on February 8, 2016) and Valentine’s Day after that, so there will likely be a strong demand for gold jewelry through February.

#2: Rising Physical Demand: When gold prices are low, coin buyers return to the bullion coin market.  When gold rose in October, U.S. Mint sales were down from their summer highs.  But when gold prices fell last week, the physical buyers returned.  The U.S. Mint sold 36,500 Troy ounces of Gold American Eagles last week (the first week November), and 1,079,500 Troy ounces of the Silver American Eagle. 

#3: China is Recovering: China is the world’s #1 producer and #1 consumer of gold.  After a real estate bust and a stock market bubble earlier this year, the Chinese economy and market are recovering, putting more money in the pockets of more Chinese investors.  The Chinese stock market is now up 20% from its late-August lows.  In the latest week on record, 57 tons of gold bullion were withdrawn from the Shanghai Gold Exchange – on a pace to make 2015 a record year for physical Chinese gold demand.

#4: New Supply is Peaking: The supply of newly-mined gold is likely to peak in 2015, based on the fact that exploration for new gold peaked 20 years ago in 1995, and it takes an average 20 years to bring a new discovery to peak production.  Despite the rising price of gold from 2001 to 2011, very few profitable and economic discoveries have been made in the last 15 years.  In most new mines, there is only one part gold per million parts of dirt, rock and other worthless ore being mined deep below ground in remote locations.

Civil War Gold Survives: At Historic U.S. Mint

On the battlefield, the British-made Whitworth rifle was a favorite weapon of Yankee and Confederate sharpshooters during the Civil War.  On the home front, hard money – especially gold coinage – would have enjoyed similar popularity with civilians … if they could have gotten it.  Coins of all kinds virtually vanished from view in both the North and the South because of widespread hoarding during the war.

The Union and Confederacy both issued paper money to keep the wheels of commerce turning and pay their large armies, but almost no one trusted it.   Many remembered hearing the phrase “not worth a Continental” to describe the colonies’ nearly worthless currency during the American Revolution. 

Gold coins were minted during the Civil War, but few found their way into people’s pockets and purses until hostilities ended.  Some turned out to be quite scarce and all are prized today as valuable collectibles.

Recently, we acquired an original collection of popular double eagles - $20 gold pieces - issued during the War Between the States.  Heightening their historical significance all had been stored for many years at the old San Francisco Mint, one of the few major buildings to survive that city’s calamitous earthquake in 1906.  That building, now a museum, is affectionately known as “The Granite Lady” because it withstood the quake and the fires that followed.

This collection contains original double eagles dated between 1862 and 1865, many bearing the coveted “S” mint mark, showing they were made at the San Francisco Mint.  We immediately had them submitted to the respected Professional Coin Grading Service, and Numismatic Guaranty Corporation, which certified their authenticity and grade and sealed them in protective holders displaying their Granite Lady pedigree.  Call us for current price and availability.

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