August 2016 – Week 1 Edition

Bets Favor Gold

Gold gained $20 on Friday – rising from $1,334 to $1,355 – in the wake of a very low GDP number.  The Wall Street Journal had expected 2.6% annualized growth in the second quarter (ending June 30), but the actual number came in much lower, 1.2%.  This virtually guarantees that there will be no Federal Reserve interest rate increase in September or early November – right before the elections – giving gold a relative advantage over cash in terms of total return – capital gains plus interest income.  Right now, the betting is that there is just a 12% chance of a rate increase in September and 88% chance that rates will not change.

Gold ETF Buying is the “New India” of Gold Demand

In previous years, India was the #1 gold buyer in the world, with China recently displacing India in the #1 spot.  Now, a relatively new source of major demand has replaced both China and India in total demand so far in 2016.  On Wall Street, there is a practice called “asset allocation,” which constructs balanced portfolio mixes for clients, based on their age, financial situation and investment goals.  For decades, that mix included three basic elements – stocks, bonds and cash, in that order. Now, quite a few investment advisors are adding gold to the mix, and the largest gold ETF (symbol: GLD) is the most convenient way for Wall Street money managers to invest in gold without having to buy and store the physical metal.

For each share of paper gold that traders buy in the “GLD” ETF, the ETF managers are required to buy the equivalent amount of physical gold.  In the first half of 2016, the demand for gold to fund gold ETFs has exceeded demand in India and China, which has been weaker than usual this year, due to a variety of causes – mostly government regulations in India (which led to a strike by jewelers) and an economic slowdown in China.  The combined demand for gold in China and India in the first half of 2016 was 505 metric tons vs. 586 tons of gold bought by the world’s gold-backed ETFs, according to the latest quarterly report by GFMS Thomson Reuters, so gold ETF demand is making up for the slack in India and China.

Gold and Silver Coin Demand Soars

The higher gold and silver prices reflected soaring demand for gold and silver, especially in the form of the most popular bullion coins.  Sales of both gold and silver American Eagles rose sharply in the first half of 2016.

Collectible coins also have enjoyed higher demand.  I see this not only in rising sales but also in the questions I receive from listeners to my radio show in Beaumont.  I’m consistently asked how much Morgan and Peace silver dollars are worth.  Typically, collectors inquire about mint-state examples, while non-collectors – people whose families own a few old coins – want to know about circulated pieces.  In both cases, the market has been very strong.

There’s also lots of interest in “junk” silver – circulated common-date silver coins, usually sold by the bag, that bring minimal premiums over bulk silver of similar weight, yet would be far useful in day-to-day transactions if there were an economic calamity.

It occurs to me, by the way, that searching for silver coins in circulation would be an excellent – and potentially rewarding – way for young collectors to get started in the hobby.  That’s the way I financed my early coin purchases back in the late 1960s.  I would cherry-pick dimes, quarters and half dollars for those containing silver, then sell these for their silver value.

The premiums were much smaller then, of course; on the other hand, silver coins were much easier to find.  Obviously, circulating silver coins are few and far between today – but they’re also worth much more.  Whereas I might have gotten a dollar-and-a-half for silver coins with a face value of a dollar, those same coins could be sold as bullion now for about $14.

Some Influential Voices Are Becoming More Positive on Gold

The pro-gold bandwagon is continuing in major investment houses as they add gold to their product mix:

Toronto-Dominion Bank is one of Canada’s largest investment banks.  Their investment arm is called TD Asset Management.  Last week, Bruce Cooper, TD Asset Management’s chief investment officer, was profiled in a Bloomberg report saying that “gold is the best investment bet in view of the fact that the global economy is stuck in neutral.” Cooper’s TD Asset Management, which manages $230 billion in total assets, declared that it went “maximum overweight” in gold for its portfolios in the second quarter, moving up from “modest overweight” in the opening quarter. Cooper told Bloomberg that “we turned more positive on gold at the beginning of the year and then we reinforced that in the second quarter.”

A research report from Citigroup projected three scenarios for gold in the second half: (1) a “base case” (65% chance) that gold will stay around $1,300 to $1,350; (2) a 25% bullish case for a rise to $1,400 this quarter and $1,425 in the fourth quarter, and (3) a 10% bearish chance for a drop to $1,000 by year’s end.  Market Realist editor Meera Shawn read the full report and concluded that the odds for the bullish case should rise, writing: “The risk of recession is overpowering, providing a stronger bull case for gold.”

On CNBC TV last week, Boris Schlossberg, managing director for foreign exchange strategy at BK Asset Management, said that the Fed’s reluctance to raise rates favors gold.  “Until and unless central banks begin to tighten policy, gold continues to be an unabashedly strong buy” and “we have a very reasonable chance to make $1,400 on gold before the end of the year, assuming the Fed stays stationary.”

On the same TV program, Jonathan Krinsky, chief economist and market strategist at MKM Partners, said that silver tends to lead gold in a bull market, explaining that “Silver is the higher beta metal, and historically in bull markets in precious metals, you see silver outperforming gold.” Krinsky sees $1,400 gold as a stepping stone to $1,500: “If you close above $1,400,” he said, gold could “hit an ‘air pocket’ that could get up to $1,500.”  That’s why, he said, that any close about $1,400 would be “very bullish.”

Marc Faber, editor of the Gloom, Boom, and Doom Report, has always been bullish on gold, but now he is advising others to take up a 25% position in the metal.  He told a group of investment professionals at the CFA Institute Conference in Chicago that they should put 25% of their portfolios in gold bullion. The Chicago Tribune reported that Faber told these influential money managers that gold is a “protection from a dangerous combination of tremendous government debt and massive bond-buying by central banks globally trying to fight off recession with near-zero interest rates.” Faber scoffed at the typical investment portfolio that kept a token 1% of a portfolio in gold and advised them not to be prejudiced against gold.

Metals Market Report Archive >