Metals Market Report Archive
Metals Market Report 11-21-2017

The Mike Fuljenz Metals Market Report

November, 2017 - Week 3 Edition

Central Bank (and Chinese) Gold Demand Soared in the Third Quarter

In addition to rising demand from hedge fund managers, central banks increased their gold demand 25% last quarter, according to the World Gold Council’s “Gold Demand Trends Q3 217 Report,” released last week.  Global banks bought 111 metric tons of gold last quarter vs. 88.8 tons in the same quarter in 2016.

The leading gold buying central bank nations were: (1) The Russian Federation, buying 63 tons last quarter and 164 tons year-to-date, well ahead of the 129 tons bought in the first nine months of 2016; (2) The Central Bank of Turkey bought 30.4 tons of gold in the third quarter year, bringing its total holdings to 167.4 tons at the end of September. (3) Kazakhstan has added to its gold holdings every month for the last five years.  Last quarter, Kazakhstan bought another 10.3 tons of gold. Other buyers were Qatar (3.1 tons), the Kyrgyz Republic (1.3 tons), Indonesia (1.2 tons) and Mongolia (0.4 tons).

Through the end of September, total gold demand in China this year rose more than 15%.  Gold bar purchases soared more than 40%.  Gold jewelry, which makes up most of Chinese demand, also rose.  Global demand for gold bars and coins also rose, gaining 17% compared to the same quarter last year.

Major Fund Manager Ray Dalio is Buying MUCH MORE Gold

Every quarter, major hedge fund managers must declare their holdings by the middle of the following quarter – meaning November 15 for holdings as of September 30. From these filings, we learned last week that the most famous billionaire gold bug fund manager John Paulson held on to all his gold last quarter.  He kept his holdings in SPDR Gold Trust steady at 4.36 million shares valued at $530 million.  He also kept all his shares in various gold stocks. George Soros, however, has abandoned gold in 2017.

Another billionaire hedge fund manager, Ray Dalio, revealed that his Bridgewater fund more than tripled its holdings in the iShares Gold Trust and multiplied its SPDR Gold Shares holdings by nearly seven-fold. Bridgewater raised its holdings of SPDR Gold Shares from 570,000 to 3,890,000 shares, and raised its commitment in iShares Gold from 3.1 million shares to 11.3 million, according to their quarterly filings.

All in all, hedge funds and other investors added a combined $672 million in their holdings in SPDR Gold, the world’s biggest gold ETF, and another $764 million into iShares Gold, according to Bloomberg.

Gold Scored Another Good Week

Gold scored another good week, topping $1,295 last Friday, but gold fell $20 to $1,275 on Monday morning.  The major cause of the gold rally last week was a decline in the dollar, followed by the passage of a major tax bill in the House and revelations that billionaire hedge fund manager Ray Dalio had bought a huge amount of gold for his Bridgewater fund during the third quarter.  In a mirror image, gold declined on Monday when the U.S. dollar rose, the price of oil fell and the U.S. stock market began to recover.

Many Lower Grade U.S. Gold Coins are a Better Buy Than Bullion

One reason we talk so much about gold bullion is that prices for many common-date classic U.S. gold coins (minted before 1934) tend to move with the price of gold.  This is not true of rare U.S. gold coins, of course, but it is true of circulated gold coins and some common-date uncirculated lower grade gold coins. In a strong bull market, these coins have historically traded at more significant premiums to the price of gold, but now the more commonly-traded gold coins are close to the price of gold bullion itself, so this marks a unique buying opportunity for leveraging the price of gold by owning common-date lower grade uncirculated U.S. gold coins, like MS-62 or MS-63 $20 Liberties, with little “downside risk” outside of the price of gold itself.

Gold mining stocks are also touted as a way to “leverage the price of gold,” but they don’t have the inherent advantage of rare gold coins. While a well-run gold mining stock can leverage the price of gold on the upside, it will also leverage gold to the downside, and many gold mining stocks disappear entirely due to bad management or an uneconomic mine, where it is not profitable to mine gold at a price below $1,200.  With rare gold coins you will never see them trading below the price of their “melt value” gold.

Many pre-1934 low grade U.S. gold coins have recently traded at their lowest premium above gold in the last 15 years.  Some circulated gold double eagles are trading just above their melt value. At the same time there is great demand for the next tier up in quality which we strongly recommend as an alternative to gold bullion bars and coins.  We continue to recommend that investors buy some high grade classic gold coins and rare coins for their superior profit potential.

 

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