November 2018 - Week 3 Edition

How Might Gold, Stocks and Rare Coins Perform During another Long Impeachment Process?

Gold rose from under $1,200 last Tuesday to $1,224 Friday, doing most of the heavy lifting Friday, rising from $1,215 to $1,224 in less than two hours Friday morning, November 16. The U.S. dollar was slightly lower while the U.S. stock market was down sharply (-909 Dow points) early in the week before retracing about one-third of that ground, then falling sharply again early this week.  In the two months since September 20, the S&P 500 is down 10% while gold is up 2% for a 12% differential.

With the Democrats taking over the House, the chatter and chances for articles of impeachment against President Trump have increased. The last time a Republican President faced such odds was in 1972, when President Nixon was re-elected but faced a 255-180 Democratic majority in the House. When the details of the June 1972 Watergate break-in and the subsequent cover-up began to surface, Nixon’s popularity and political support began to unravel. When that happened, the stock market peaked in early 1973 and went into its worst bear market of the postwar era (and the worst we’d see until 2008-09), while gold began its longest and strongest bull market, with rare coins leveraging those gains with one of its strongest bull markets. 

The Dow Industrials declined from 1051.70 on January 11, 1973 to 577.60 on December 6, 1974, falling 45.1% in less than two years. That coincided with one of the biggest bull markets in gold and rare coins.  Gold nearly tripled, from barely $60 to over $180.  Here are the December averages from 1972 to 1974:

The bulk of the stock market decline came during the third quarter of 1974, during the time leading up to President Nixon’s resignation and then President Ford’s pardoning of the disgraced past President. Here are three specific dates, one month apart, showing how fast the Dow declined after the President resigned:

* On October 8, 1974, President Ford addressed Congress in a televised speech entitled “Whip Inflation Now,” calling inflation “public enemy number one.” In the speech, Ford called on the nation – not the Federal Reserve or Congress! – to solve inflation through micro-managing their lives by turning down their thermostats, carpooling, starting their own vegetable gardens and wearing “WIN” buttons (WIN = “Whip Inflation Now”). Some skeptics turned their WIN buttons upside down and said “NIM” stood for “No Immediate Miracles” or “Need Immediate Money” or “Nonstop Inflationary Madness.” 

In this inflationary environment, bonds were “certificates of guaranteed loss,” cash was losing ground and stocks not only lost value in nominal terms but were losing money twice as fast in real (after-inflation) terms. At the same time, the Fed was raising interest rates to new postwar highs, raising rates nine times in 15 months, from 4.5% to 8.0%. Gold was one of the only investments going up, but it was illegal for Americans to own gold until the final day of 1974, when that 41-year-old law was finally repealed. 

As gold kept rising, many U.S. investors turned to numismatic coins, like Morgan silver dollars, classic commemorative half dollars or rare gold coins.  From 1972 to 1974, many rare coins rose far more than gold or silver bullion prices alone, while the Rare Coin CU 3000 index rose 348% -- more than four-fold.

Similar drama unfolded in 1976-1980, 1986-1990, and in the early 2000s but we’ll save those stories for later. Could this happen again if President Trump comes under impeachment pressure?  While we may not see this happen at the same percentage levels as in the early 1970s, when gold prices were so low, but the stock market could indeed fall by 40% or more, as it did in both 1973-74 and 2007-09, with an equivalent rise in gold. 

As in all those past episodes of political uncertainty and wild stock market gyrations, it pays to take some stock market profits off the table and invest in gold and silver bullion and rare coins. It never pays to wait too long, since stocks can fall very fast – and coins can rise very fast – in times of national uncertainty.

Central Banks Are Loading Up on Gold Once Again – and You Should Too!

The World Gold Council just reported that central bank demand for gold rose 22% in the third quarter of 2018 vs. the same quarter in 2017, reaching “the highest level of quarterly demand since Q4’15.” This also marks the highest level of year-to-date central bank demand in the first nine months of any year since 2015. Russia added the most of any nation – 92.2 million metric tons – pushing its total reserve to over 2,000 tons, as Russia is basically divesting itself of all of its U.S. Treasuries in exchange for gold. 

Turkey was the second-largest gold accumulator last quarter, adding 18.5 tons in a quarter during which its beleaguered currency (the lira) lost 25% to the dollar. India is next in line, adding 13.7 tons of gold last quarter. Kazakhstan was the fourth biggest buyer last quarter, adding 13.4 tons, bringing its total holdings to 335.1 tons, up from just 131 tons five years ago. Kazakhstan has bought some central bank gold every month for over 70 straight months. After quarter’s end, in early October, Hungary announced it had increased its gold reserves 10-fold, from 3.1 to 31.5 tons, due to gold’s lack of “counterparty risk.”  Several other nations have also announced smaller purchases or plans to buy more gold in the near future. 

The currencies of these gold-accumulating nations have been particularly weak to the dollar this year, which means that gold has risen in terms of their home currencies, even though it has fallen in dollar terms. Here are the four biggest gold-buying nations in the last quarter, and how gold has performed in their home currency during the first nine months of 2018 (compared to a 5.6% decline in dollar terms).

Such massive levels of gold buying by Russia and China should raise “red flags” in Washington, DC. These are two superpowers that may have tried to hack the U.S. elections in 2016. They have also tried to expand their borders and steal U.S. intellectual property. Both have been in the process of selling their dollar-based Treasury holdings and buying gold to gain more financial flexibility – and you should too!

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