Metals Market Report Archive

The Mike Fuljenz Metals Market Report

October 2019 - Week 1 Edition

The Trump Impeachment Process Begins:
How the Impeachment Process Could Impact Gold & Why it Pays to Invest in Rare Coins Now

With the Democrat led House of Representatives finally taking the first step to file articles of impeachment against President Trump, we need to look at the last two times a Democratic Congress filed articles of impeachment against a Republican President. The first time was in 1974, after President Nixon was re-elected in a landslide 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 enemies were given a platform for impeachment.

What happened next? Stocks collapsed sharply, and gold soared. The Dow fell from 1051.70 on January 11, 1973 to 577.60 on December 6, 1974, down 45% in just under two years. That coincided with one of the biggest bull markets in gold and rare coins.  Gold tripled, from barely $60 to nearly $190.

The bulk of the stock market decline came in 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:

In this inflationary environment, bonds were called “certificates of guaranteed loss,” cash was losing ground, stocks were losing 45% in nominal terms and falling 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up, but it was illegal for Americans to own gold until the final days of 1974, when that 41-year-old law was finally repealed.

As gold kept rising, many U.S. investors turned to numismatic coins.  From 1972 to 1974, many rare coins rose far more than gold or silver bullion alone. For instance, the Rare Coin CU 3000 index rose 348% then, over four-fold.

In 1987, there was a less-successful threat of impeachment against President Ronald Reagan. On March 6, 1987, Representative Henry B. Gonzales (D-Texas) introduced articles of impeachment against President Reagan regarding the Iran Contra affair. It’s not well remembered today, but there were hearings running three months – from May 5 to August 6, 1987 – including testimony by Oliver North and others, followed by Congressional Committee meetings investigating Iran-Contra through the fall. The impeachment threat wasn’t over until the final committee report came out in November, after a huge 36% stock market crash!

At the same time, we saw the beginnings of a huge bull market in rare coins. From 1986 to 1990, the Rare Coin CU 3000 Index rose 665% at a time when gold bullion and stocks were essentially flat.

The bottom line is that it pays to invest in rare coins when impeachment threats are in the air. The House will not likely succeed in removing President Trump from office. This will more likely resemble the failed Reagan impeachment effort than the successful Nixon attack – but as with any past episode of political uncertainty and wild stock market gyrations, it pays to take some stock market profits 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, such as we are entering now.

Did the Fed Lose Control of Interest Rates in Mid-September?

Ever since the Financial Crisis of 2008, when stocks collapsed and gold soared, there have been some close calls, including two “flash crashes” in the stock market, when the Dow dropped 1,000 points in a matter of minutes. Those problems were eventually solved, but the process was frightening to investors.

Something similar happened two weeks ago. When the Federal Reserve’s Open Market Committee (FOMC) was meeting to set interest rate policies on September 17-18 in Washington, DC, the national banking system apparently lost control of another short-term interest rate when repurchase (repo) rates spiked briefly to 8.5%, four times their normal rate. This happened as the quarterly tax filing date of September 15 approached and corporate clients withdrew funds to pay taxes. Banks were slow to add to reserves. This forced the Fed to step in and conduct repurchase (repo) operations for the first time in over a decade in an attempt to get interest rates back within its target range.  The New York Fed conducted $75 billion of repurchases of Treasury, government agency and mortgage-backed securities September 17-18.

The good news is that these repurchase auctions were oversubscribed by $13.4 billion, so the crisis ended quickly, and so the Fed decided to extend these repo operations into October. Essentially the Fed is now using this crisis to add reserves to its balance sheet and re-inflating its reserves. The end result is that these new “repo” operations have become a new form of quantitative easing (adding new money supply).

Ironically, this latest “near miss” came on the 11th anniversary of the Crash of 2008, when the failure of Lehman Brothers on September 15, 2008 sent Wall Street into a tailspin, with the Dow falling 500 points that day and 800 points in three days on the way to a 40% decline in the following six months, as liquidity dried up and the world faced the worst financial crisis since the Great Depression. Ever since, the market has seen a series of panics and close calls, so investors wondered if this would cause another flash crash.

Bottom line, we generally feel it is important to be invested in both stocks and gold, but in balance, not to be over-weighted in stocks at these lofty highs. If your stock position is moderate, you generally need not fear normal corrections in the stock market, including panic attacks that happen several times each year.

Gold Dips

Gold dipped below $1,500 on Friday, September 27, and silver retreated below $18, then fell to nearly $17 on Monday, as the precious metals seem to take another “breather” at the end of September. After leading stocks for most of September, stocks passed the precious metals for year-to-date performance on the last day of September. While the dollar has been strong, it’s important to remember that gold hit an all-time high in terms of British pounds at 1,278 pounds per ounce in early September, when the pound sank to a 34-year low of $1.20 to the dollar in the middle of Boris Johnson’s latest Brexit crisis in Britain.


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