March 2017 - Week 2 Edition

The Netherlands (and Europe) Could “Vote for Gold” This Week

Gold and stocks fell last week after both had risen strongly so far in 2017. The proximate cause for both corrections was the run of “good news” on the economy, which convinced market traders that the Federal Reserve would likely raise rates this week.  The best news was Friday’s healthy jobs report.  Traders tend to assume that a rate increase would be bad for gold, but as we’ve said all along, gold rose during the last rate-raising cycle (2004-06), and gold also rose after each of the two rate increases of the last two years.  Gold routinely dips before the rate increase, but then rebounds once the rate increase has been announced.

In light of the big news in America – centered around Trump’s policies and the Fed’s rate increase – the press has acted like the rest of the world doesn’t exit, but Bank of America Merrill Lynch said last week that “the market seems to be ignoring … the upcoming electoral cycle in Europe.”  The bank expects gold to climb $200 from here to reach $1,400 by the end of 2017, due to “inflation and a range of uncertainties, including European elections and protectionism,” in which case gold will become a haven of safety again.

This week, the Netherlands holds the first of several major European elections this year.  As in France, which holds elections next month, the populist party leads in the polls, leading to a possible dissolution of the European Union (EU) later this year.  Meanwhile, a longer-term, ongoing election throughout Europe is the people voting for gold as a long-term hedge against the possible end of the euro currency.  If France and other major powers elect to abandon the euro and return to their old nationalist currencies, there could be an even more pervasive run on gold in advance of the anticipated end of the 18-year-old euro currency.

ABN Amro, the third largest bank in the Netherlands, still likes gold, despite its recent price correction. Georgette Boele, coordinator of foreign exchange (FX) and precious metals strategy at ABN Amro, says that gold has held up quite well during last week’s pullback. Writing in the bank’s Precious Metals Watch, she said, “Despite the recent sell-off, we think that gold prices have been very resilient, given the circumstances.” For instance, she said that gold has been rising in parallel with stocks, which is not very common. “Often, a strong rise in equity markets coincides with considerably weaker gold prices. This has not been the case this year,” she said. This year, gold and stock prices have risen (or fallen) in tandem.

Gold Demand in India Continues to Recover

It’s hard to keep 1.1 billion gold-loving people from buying the metal they trust most.  A poll by the World Gold Council last year found that 63% of respondents in India agreed with the statement “I trust gold more than the currencies of countries.” More importantly, 73% agreed with the statement “gold makes me feel secure for the long-term.”  Compare that with the small minority of citizens in the United States that own gold or follow the gold market closely.  India is clearly dedicated to owning more gold!

The government of Narendra Modi (India’s Prime Minister since May of 2014) has instituted some of the worst ideas imaginable to regulate the gold market – like huge tariffs or a recall of large-denomination cash – to dampen gold demand, but the people of India will not be denied. Figures just released for February show that India’s gold imports nearly tripled over the same month last year.  Gold imports grew from 35 metric tons in February 2016 to 97.4 tons last month. Mehul Choksi, chairman of jewelry store chain Gitanjali Gems Ltd. in Mumbai (formerly Bombay), said “We expect some heavy buying in April as a large number of weddings are expected to take place” (the wedding season runs from April to July).

Citibank has estimated that India’s gold imports will reach 720 tons this year. Longer-term, the World Gold Council estimates that India’s gold imports will reach 950 tons per year by 2020, due primarily to India’s rapid economic growth and the emergence of regulated exchanges not relying on cash purchases.

The newest attack by the Modi government is to limit cash transactions to the equivalent of $4,500 (less than four Troy ounces of gold) as of April 1 – right at the start of the wedding season.  That may be one reason for rising demand in February and March. The World Gold Council said, “This will have the greatest impact in rural India, where people do not necessarily have access to checks and electronic payments.” WGC said that one unexpected consequence could be gold shoppers buying “smaller amounts of gold spread over more transactions…or it could push a large part of demand underground and encourage growth in the black market,” but “over time, consumers will move away from cash towards digital payments, and organized players should benefit from this trend. This change in market dynamics will result in more transparency and a better deal for consumers, protecting them from shady practices such as under-karating,” a practice of labeling jewelry as 14-karat, for instance, when it may be 10- or 12-karat.  This practice makes ownership of pure (.999+) gold coins and bars far preferable to gold jewelry.

Why I Write about Gold More than Gold Coins

Some clients and customers I meet wonder why I don’t write more about rare coins than gold and silver bullion. After all, I have written several award-winning books about coins and specific coin series, like Gold Double Eagles (of various types) and Gold Indian coins of several denominations and mints.

My answer is that a rising price of gold and silver invariably awakens the public’s interest in owning gold, through bullion coins at first.  This increases first-time callers to our coin company, since our advertising works better in a rising bullion market than when prices are falling.  This year is starting out with a gold bull market surge, so we are receiving more first-time callers than usual.  Many of them quickly become interested in rare silver and gold coins. In addition, many customers order my books on gold Indian coins and other rarities and become interested in owning a selection of rare gold and silver coins.  This is why I talk about gold. A rise in the price of gold motivates the public to pay attention to ads for American Silver Eagles, or Canadian gold coins, and then they discover the beauty and rarity of historical gold and silver.  These factors have contributed to explosive rare coin bull markets in the past, with increases of 100% to over 1000%.

By the way, we keep extensive “wish lists” for rare coins, such as the 1908-S $5 and $10 Indian in MS-61 to MS-63, or the Carson City mint’s $5 and $10 gold coins. I advise our customers to tell us if they are looking for a coin they can’t find.  Contact one of our representatives and we will keep our eye out for specific rare coins when we travel to buy coins.

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