May 2016 – Week 2 Edition

Billionaire Stanley Druckenmiller Says “Sell Stocks” and “Buy Gold”

The most important gathering for highly successful hedge fund managers and other major asset managers each year is the Sohn Investment Conference in New York.  In last week’s meeting, the world-renowned billionaire investor Stanley Druckenmiller shared his view that the stock market has “exhausted itself,” making gold a far superior investment looking forward. Druckenmiller’s Duquesne Capital fund has recorded superior annual returns over the last 35 years. From 1986 to 2010, his fund averaged 30% per year. His group has never had a losing year and he’s up 8% so far this year (while stocks are only up 1%).

At the Sohn conference, Druckenmiller said that the “volatility in global equity markets over the past year… often precedes a major trend change.”  With central bankers around the world toying with what he called “the absurd notion of negative interest rates,” Druckenmiller says he prefers gold, saying: “Some regard it as a metal; we regard it as a currency, and it remains our largest currency allocation.”

At the start of this year, UBS gave the same advice (“Sell stocks” and “buy gold”).  Then, billionaire investor Mark Cuban offered the same advice on CNBC on February 11, 2016.  More and more mainstream banks and independent fund managers are turning from stocks toward gold in 2016.

Gold Rose $15 in One Minute

Gold rose $15 in one minute on Friday morning, rising from $1278 to $1293 after the monthly jobs report showed 20% fewer jobs were created in April than economists had expected.  It’s irrational, but many “paper gold” (ETF or gold futures) investors turn hot or cold on gold based on economic statistics.  Since the April jobs total was 160,000, vs. 205,000 expected, this created the perception that the Fed has no room to raise rates until after the Presidential elections in November.  This gives gold a much longer run with an even playing field vs. cash, since neither cash nor gold offer any meaningful interest income.

Paper Gold (ETF) Demand is Up Sharply in 2016

While physical gold demand has been weaker than usual in China and India, “paper gold” demand has been strong in New York, once again proving that the paper gold investors are the “tail that wags the dog” in the gold market, since they can use extensive leverage in taking their positions in gold futures or ETFs. 

Sharps Pixley CEO Ross Norman wonders how long this split between physical demand and paper gold demand can last.  “The key question in our mind is whether a paper rally in gold can be sustained without the significant engagement of the physical community.” He says that during the first quarter of 2016, physical demand for gold declined 23.8% (vs. 1Q15 according to GFMS), yet gold prices rallied 22%.  The vital challenge now is to see rising physical demand, especially in Asia, so that physical demand can pick up a head of steam before fickle paper gold buyers sense a change in direction and sell gold ETFs.

Newmont Mining CEO Gary Goldberg said in a Webcast last week that new gold discoveries dropped sharply between 2007 and 2012, causing production from new mines to decrease “due to aging ore bodies and slower project development.”  He believes the demand curve will resume in India and China soon, since “China’s middle class is expected to grow to 500 million by 2020, and India’s middle class is also expected to double and surpass 500 million by 2025.”  Asia helped drive gold demand from 2001 to 2011, when China and India became the fastest growing economies in the world.  When more of the 2.5 billion folks in those two gigantic nations earn enough money for luxuries, they will want to purchase more gold.

U.S. Mint Sold Twice as Many American Eagle Gold Coins in 2016 vs. 2015

Over the first four months of 2016, the U.S. Mint sold 351,000 ounces of Gold American Eagle coins, exactly double the 175,500 ounces sold in the first four months of 2015.  The gain in April was much larger.  In April 2015, the Mint sold 29,500 ounces of Gold American Eagles.  This April, the Mint sold 105,000 ounces of Gold American Eagles, an increase of 256%.  Silver American Eagle sales were up more moderately (27%) from 14,922,000 in the first four months of 2015 to 18,914,500 ounces this year.

It’s important to remember that when investors turn to gold and silver bullion coins, they often become interested in classical American gold and silver numismatic coins, too.  In addition, great interest will be focused on U.S. paper currency in the next few months with the emergence of the Harriet Tubman $20 bills, as well as selected Civil Rights figures on the back of Lincoln’s $5 bill, and American suffragettes on the reverse of Hamilton’s $10 bills.  For the time being, partly due to the popularity of the Broadway musical “Hamilton,” his face is now safe. As the Wall Street Journal put it, “Alexander Hamilton dodged the bullet this time.”

Metals Market Report Archive >