February 2023 - Week 2 Edition

Don’t Fret Gold’s Over-reaction to a Single Economic Report

Gold overreacted to a bullish but preliminary jobs report on Friday, which stated that 517,000 new jobs were created in January, even though it was released only two days after the end of the month and the private payroll company ADP only counted 106,000 new private-sector payroll jobs in January!

These payroll reports are subject to large revisions 30 days later and they seldom note the quality of the jobs being created or the massive numbers of people who have dropped out of the labor force. However, gold traders quickly overreacted and gold fell $50 in the five hours after the release of the data Friday morning.

Don’t overreact to gold’s overreaction, since traders are notoriously “weak hands” in the gold market.  They have little or no long-term loyalty to gold but we know gold is a long-term insurance policy against paper money deterioration (inflation) and international tension, which is clearly advancing with China’s assault on America’s air space or Russia’s likely preparation for a second (and bigger) Ukraine Invasion.

Gold mostly stayed below $1,880 on Monday, February 6, even though bargain hunters were back in the gold market. Gold’s rise in dollar terms was partly muted by a suddenly strong dollar in the first week of February plus new concerns that the Federal Reserve will most likely keep raising interest rates.  From a low of 101.2 on February 1, the U.S. Dollar Index (DXY) rose 2.4% to 103.6 on Monday, February 6. In the previous four months, the dollar declined 11% from the end of September to the end of January 2023.

The World Gold Council Reported an 11-Year High in Gold Demand

Gold demand reached an 11-year high (most since 2011) in 2022, primarily fueled by the highest volume of central bank buying recorded in 55 years (ever since the major crisis in the British pound in 1967), according to the annual Gold Demand report, released by the World Gold Council last week, February 1.

In summary, gold demand rose 18% over 2021, reaching 4,741 metric tons (each ton amounts to 32,150 Troy ounces), not counting the active over-the-counter (OTC) trading markets. Central banks bought 1,136 (24%) of those tons, a 152% increase over 2021 when central banks bought only 450 tons of gold.

Central bank buying increased sharply in the second half of the year, with only 275 tons bought in the first half, then a huge jump to 445 tons in the third quarter and 417 tons in the fourth quarter, mostly due to concern over stubbornly high inflation and rising global tensions with no safe global reserve currency. (The U.S. dollar peaked in late September, with no clear replacement currency as a safe “paper” reserve.)

In other demand categories, private investment increased by 10%, while jewelry consumption dropped 3% and gold ETFs saw smaller outflows in 2022 than in previous years. Total gold supply was close to demand, at 4,755 tons, up 2% from 2021, with mine production reaching a four-year high of 3,612 tons.

For most of 2022, gold was down in dollar terms and rising in most other currencies, but the rapid drop in the dollar in the fourth quarter pushed gold into positive territory for most currencies for the full year, while global stock markets all declined – most of them declining in double digits. This is a case of gold rewarding patient investors while frustrating any short-term traders who sold their gold prematurely.

Production Challenges and High Premiums STILL Impacting U.S. Mint Bullion Sales

As we said last week, the U.S. Mint continues to lag behind last year’s sales of the American Eagle Gold and Silver coins, due to delays in production and delivery and high costs to their authorized purchasers (AP’s), but last week we heard from one of those AP’s, who said they wanted to order more coins but they were turned away. The Mint is required by law to meet demand in a timely manner, and they may not be doing so for reasons we do not fully understand, except that government is seldom as reliable as a private business to meet demand on a timely basis. If we failed to deliver on our promises, we could go out of business, but a government agency will last forever if they keep getting their annual funding.

We are in the middle of a strong surge in gold and silver prices since last October, yet the sale of U.S. Mint bullion coins continues to decline while many world bullion coin sales increase. That doesn’t make sense. Global mints can turn out bullion coins for as little as a 3% premium over spot prices, so why should investors pay 8 percent, or more, over spot prices for U.S. Mint silver products? It’s not “the patriotic thing to do” to fund your government’s inefficiency and delay!

The January 2023 Silver American Eagle sales were 21% below last January (2022) sales, despite silver’s 29% price gain in the last four months. Authorized Purchasers (AP) wanted to buy more but, once again, the U.S. Mint allocated APs less than they requested. This probably is an indication that American Silver Eagle prices will rise higher than current levels in a few months, much like last year.  The Gold American Eagle coin sales were 19% below last January’s sales, despite gold’s recent gains, and the Gold American Buffalo sales were lagging by 13%.

Select Certified Rare Coins are Doing Better than Gold and Silver

At the beginning of 2023, many certified rare coins that have special attributes – like key historic dates, low mintages, attractive capitalization or great eye appeal – continue to be in demand and see rising prices. We particularly like coins that have low capitalization (Certified Population times Price) compared to other coins in their series. Our favorites include select dates of $2½ Indians, $3 Indians, $5 Indians, $10 Indians, Type 2 $20 Liberties, Type 3 $20 Liberties, $10 American Gold Eagles, and $25 American Gold Eagles.

Starting in mid-2019, we identified select coins in these series as our “20/20” program, and many have indeed outperformed the overall rare coin market, as well as the bullion market, since then. Many of the coins in these important series are up from 10% to 25% in the past year and 50% to 100% over the past three-plus years.  

Ask your professional account representative about our “20/20” program. You will be glad you did.

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