July 2017 - Week 4 Edition

Gold is Still the “Star of the Commodity Universe”

One of the big stories missing in the mainstream media this year is the fact that gold is up nearly 10% while the bulk of all other commodities are down – often by 10% or more.  Every weekend, The Wall Street Journal lists a table of leading commodities and gold is always the superstar at the top of the list:

This means gold is performing 17.3% above the widely-watched CRB index of 19 leading commodities. The Thompson Reuters Core Commodity CRB Commodity Index has been in existence since 1957.  It measures price trends in 19 commodities, with the greatest weight given to agricultural commodities (41%), closely followed by energy (39%), then industrial metals (13%) and precious metals (7%).

While all the news has centered around “record highs” in the stock market indexes, few have mentioned that gold’s gains in 2017 have almost exactly matched the most widely-followed stock index, the Dow Jones Industrials.  Both are up a little over 9% so far in 2017 (while the S&P 500 is up 10.4%).  A more important metric is their long-term growth rates since the beginning of the new century: Gold is up 333% and silver is up 210% vs. just 88% for the Dow Jones Industrials and 68% for the S&P 500.

Mainstream financial media: How about reporting on gold as the “star of the commodity universe”?

Gold gained another $20 last week (+1.6%) and silver gained another 2.1% in their second week of recovery after the silver market’s “flash crash” of July 6.  Gold touched a four-week high on Monday, July 24, helped by the U.S. dollar declining to a 13-month low, partly due to the rising level of political uncertainty in the U.S.  In addition, the U.S. Federal Reserve has indicated they will not raise rates when they meet this week – their announcement is scheduled to come out early Wednesday afternoon, July 26. Mario Draghi, head of the European Central Bank (ECB) also said last week that he would not raise rates.

India’s Gold Imports Surge Dramatically in May & June

For the first half of 2017, gold imports to India surpassed the total imports for the entire year of 2016.  Gold imports through June 30 reached 521 metric tons* (called tonnes), compared with 510 tonnes for all of 2016.  This was the best first six months of the year since 2012. For June alone, India imported 75 tonnes versus just 22.7 tonnes for June of 2016.  But the biggest demand month was May 2017, when 220 tonnes of gold were imported. Even if that pace slows down a bit in the second half, India could still exceed 900 tonnes of gold imports in 2017, which would make 2017 the strongest year since 2012. 

One reason for the rise in first-half demand was anticipation of the new Goods and Services Tax (GST) which was scheduled to be imposed by the Indian government at the start of July.  That’s why demand in May was so high, but the details of the plan were announced in June, and the rate was less onerous than dealers had expected.  The GST will levy a 3% tax on imports (most dealers had expected 5% or more).

The impact of the GST on gold demand will take time to measure, but strong gold demand in the first half shows that Indians still want to accumulate gold.  In one poll, 63% of Indians agreed with the statement “I trust gold more than the currencies of countries” and 73% agreed that “Gold makes me feel secure for the long-term.” India is the most rapidly-growing economy on earth, up 7% per year in GDP at latest count.  More Indians have more money to spend on gold and this 3% added tax should not reduce demand much.

*A metric ton (tonne) represents one million grams, or 1,000 kilograms, or 2,205 pounds or 32,150 Troy ounces.  At current prices, one metric ton of gold is worth about $40 million, so 500 tonnes of gold would be worth $20 billion.

Gold and Rare Coins as Valuable Diversification Vehicles

Investment advisors often speak of “negative correlation.”  In practical terms, that means that a well-protected portfolio must contain investments that “zig” while the global stock markets “zag.”  You don’t want all of your investments going down at once, right?  Most investors suffered that fate in 2008 and 2009, when all three leading asset classes (stocks, bonds and cash for income) fell at once.  That’s why investors need gold to lift a portion of their net worth higher, even while all of their other investments may sink in unison.

In the 1970s, gold quadrupled twice:  (1) First, gold rose from $42 to $200 in 1972-74 based on Watergate and President Nixon’s resignation, the Arab Oil Embargo and resulting inflation and a 50% stock market decline.  (2) Then gold quadrupled again in the late 1970s based on Carter’s failed foreign policies, an energy crisis, gas lines, double-digit interest rates, 11% unemployment and inflation.

Gold has historically risen sharply when global tensions rise.  Some examples include Russia’s late December 1979 invasion of Afghanistan, sending gold up from $450 to $850 in just three weeks.  Another dramatic example came after 9/11 in 2001.  However, gold’s most dramatic gain came in 2008, when the big financial crisis triggered a global recession.  Gold rose $100 in one day (and $160 in two weeks) when Lehman Brothers failed in the middle of September 2008.  Gold rose from just $740 on September 11, 2008 to $902 just 12 days later.  While other investments were falling, gold shot up.  In 2017 gold is up 9%, which is better than the Dow, S&P and CRB Commodity Indexes.

Numismatic coins are the most concentrated forms of wealth – so that more value can be saved in a smaller space or easily transported.  Over time, quality numismatic coins generally grow faster than gold bullion in price, according to a basket of 3000 rare coins (the PCGS® 3000 Index) that far outperformed gold bullion from 1970-2017.

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