Metals Market Report 09-15-2014

The Mike Fuljenz Metals Market Report

September 2014, Week 3 Edition

Gold fell at one point to $1225 before bouncing back to $1234 on Monday. In the London market, gold’s low point was the Friday afternoon fix at $1231.50, the lowest London price since January. Most of this decline is due to the rising dollar. The euro has fallen from $1.40 last May to $1.29 this week, meaning that the price of gold is slightly higher in euro terms than it was last May. The dollar has also gained to its other two major competitors, the Japanese yen and the British pound, which has fallen due to the vote concerning Scottish secession from the United Kingdom this Thursday. The dollar is temporarily “King,” so gold has fallen in U.S. dollar terms, even though it is trading fairly evenly in many other currencies.

Has Gold Suddenly “Lost its Shine”?

Barron’s Commodities Column this week is titled “Gold’s Shine is Gone,” by Mary de Wet. She begins by saying, “There’s not much glitter to gold these days.” In the first half of the article, she presents the case against gold, but most of her reasons lack a long-term perspective on the gold market. For example:

She writes: “Gold was a star after the financial crisis, with investors buying the metal to protect their wealth against potential inflation or currency devaluation.” No, that’s not a fair explanation of what happened during gold’s 10-year bull market (2001-2011). Gold’s bull market began in 2001, after the attack on America on 9-11. Most of gold’s gains came between 2001 and 2008, not after 2008. Gold rose from $271 per ounce on September 10, 2011 (the day before 9-11) to $1011 on March 17, 2008, before the financial crisis. During the rest of 2008 – during the financial crisis – gold actually declined.

She then quotes a Bank of America Merrill Lynch analyst who said: “Rates have a strong influence on gold, given they represent opportunity costs for the non-yielding metal.” Once again, that comment ignores the major rise in gold prices from 2001 to 2008, when interest rates were much higher than they have been since 2008. The Fed Funds rate (the major short-term rate controlled by the Federal Reserve) rose from 1% on June 30, 2003 to 5.25% three years later, on June 30, 2006 (vs. 0.25% now). The price of gold rose from $346 to $613 per ounce during those three years (2003-6) of rapidly rising interest rates.

She then says that the expectations about the Fed raising rates a little next year is “pushing the dollar to new heights, as higher rates would attract investors looking for bigger returns.” Not really. The dollar is rising as a relative “safe haven” while the euro, yen, Russian ruble, British pound and other currencies are retreating. The Ruble is falling due to Putin’s war with Ukraine; the Yen is falling due to rising inflation and slower economic growth in Japan. The British pound is falling because of the threatened Scottish secession, and the Euro is falling since that continent is falling into deflation and recession once again, so the dollar is merely the “least ugly girl at the dance,” the “least bad” paper currency in the world today.

Finally, she says, “Gold can’t even count on Asia to prop up prices. China and India, the world’s top consumers of the metal, have scaled back on their purchases this year.” That’s a half-truth.

It depends on which month you use for measuring demand. She admits that fact toward the end of her article, when she writes: “Commerzbank expects China and India to increase their gold imports in the coming months and forecasts gold prices to end the year at $1,300 per ounce. Gold purchases in India usually ramp up ahead of Diwali, a Hindu festival and gold-giving occasion that falls on October 23 this year.”

In summary, New York stock market journals tend to follow the trends. When gold is down, they will write stories like “Gold’s Shine is Gone,” but when gold returns to favor, the same publications will no doubt print articles like “Gold Glitters Again.” But isn’t it better to buy gold for the long-term when the price is down?

The Federal Reserve Meets this Week: Gold Could Rise (or Fall) in Response

The Federal Open Market Committee (FOMC) meets about eight times a year. Their current meeting runs Tuesday and Wednesday, September 16-17. There has been a great deal of speculation about what they will say in their press conference on Wednesday afternoon. Gold could rise if their language sounds more “dovish” (easy money) than “hawkish” (tighter money), or gold could fall if the Fed gives a firm indication of when they plan to raise interest rates – probably in the second quarter of 2015, many months in the future. The fact is that if gold were rising and the dollar were weak, gold would rise no matter what the Fed was saying or doing (remember, gold nearly doubled from 2003 to 2006, when rates were rising).

Gold’s biggest gain in the past decade happened during the summer of 2011 in a severe financial crisis – the downgrading of U.S. debt, the ongoing Greek/euro crisis, and the fight over the U.S. debt ceiling. The direction of interest rates has been irrelevant to the rise or fall of gold prices in most of the last 13 years, so commentaries on the Fed and interest rates, without proper perspective, may just be a way for gold bears to justify their bearishness.

Taco Bell Promotes Morgan Silver Dollars

The text of the latest Taco Bell TV ad is a perfect educational tool for rare coin investors. The ad shows a grandfather proudly telling his grandson that “this silver dollar has been in our family for generations.” He tells the wide-eyed boy that “I had it with me the night I won the heart of your grandmother” (that would have been around the 1950s, when silver was still common in U.S. coinage). He goes on to say the dollar has a small bullet hole in it, claiming that it saved his life during a “construction riot” in the 1960s.

The grandfather is about to make the historic transfer of family wealth from one generation to the next when he sees a Taco Bell sign advertising their $1 menu items, so he interrupts himself in mid-sentence: “And now I want you to have … [sees the $1 menu sign] … oh, never mind.” The ad concludes that “no dollar is safe.” A more accurate lesson, of course, would be “Gresham’s Law” (named for Henry VIII’s finance minister), which says “bad money drives out good.” In this case, grandpa would spend his paper dollars for tacos and save the silver dollar, but Taco Bell pays for the ad, so grandpa wastes his heirloom.

A Morgan silver dollar is worth roughly $15 for its melt value alone, and far more for its condition and rarity, so grandpa could treat over a dozen Taco Bell customers to a $1 meal by using his silver dollar!

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