January 2024 - Week 4 Edition

Don’t Buy A Pig in A Poke

As I have stressed for years, it is extremely important to know your precious metals dealer and ensure that they are respected in the industry, is involved in professional numismatic organizations like the Professional Numismatists Guild (PNG), the Numismatic Literary Guild (NLG) or the National Coin and Bullion Association (NCBA) and has received recognition for their commitment to the hobby. Too many times I hear about people who fell for someone’s “too good to be true” advertising tactics or sales pitches and now they are out hundreds or even thousands of dollars.

We recently had a dealer, who cherry-picked his web reviews and proclaimed to be one of the most trusted in the business, but in reality, he was shipping sealed monster boxes purportedly containing 500 American Silver Eagles that were actually filled with packing and dumbbells. He told his clients not to open the boxes upon receipt because it would help increase the value when they were resold. I say, “Don’t buy a pig in a poke.” He has now pleaded guilty in federal court and is awaiting sentencing for his crimes.

Remember, as I like to say, “There is no Santa Claus in numismatics.” A coin dealer who advertises online or claims they can sell you bullion at below the spot price is either going to make up the difference in exorbitant prices elsewhere or they are misleading you. Whether you use my company or another dealer, make sure they are reputable and trustworthy.

Why Gold Sometimes Goes Down When Inflation Goes Up!

It’s confusing, I know, but gold sometimes goes down when the inflation rate goes up and it rises when the inflation rate goes down. Isn’t gold supposed to be an inflation hedge? Yes, in the long run, gold is an inflation hedge. It beats every paper currency by a long shot and gold beats inflation, too. However, in the short run, gold must compete against a market conception that it “offers no interest income.” So, some people believe gold “should” fall in price when interest rates rise and it “should” rise when interest rates fall, giving gold an even playing field. That is incorrect and gold has consistently proven its financial durability against inflation while traders bet billions on the market with the announced inflation rate being the key indicator of when the Federal Reserve will cut interest rates.

I have repeatedly shown that gold has risen the most during times of high and rising interest rates – first, 1976-80, then 2001 to 2011, and then during the Fed’s latest rate increases in 2022 and 2023, but the press constantly reports on old, outdated philosophies rather than looking at the numbers, so this tends to move the market short term.

Here’s the latest example: On Thursday, January 11, the December Consumer Price Index (CPI) was released. It was “hotter” than expected, at 3.4% over the last year (up from 3.1% in November) and 3.9% in the “core” rate (subtracting food and energy), so the price of gold declined. It dropped to its lowest level of the New Year, just $2,014 an ounce, down almost $50 in 10 days. But the next day, Friday, January 12, the Producer Price Index (PPI) came out almost flat, and negative in some categories, so gold leaped back +$33 to $2,047 and then $2,055 on January 15, as the expectations of low inflation returned.

This Friday, the Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index – the only one that counts, as far as the Fed’s policy decisions are concerned – will be released. In terms of the Goldilocks story, the CPI is usually too “hot” (too inflationary), and the PPI is too “cold” (deflationary). The PCE Index is “just right,” and gold may get a lift if the PCE rise is fairly modest.

In the past week, gold opened at $2,055 an ounce, dropped to $2,002 and then bounced back to $2,027 as inflation expectations vacillated, in a roller-coaster ride. The benchmark 10-year Treasury bond rate also ratcheted up 20 basis points, from 3.95% on January 12 to 4.15% on January 19, a five-week high. This happened as sentiment began to shift and investors gave up on their overwhelmingly euphoric expectations of the Fed lowering short-term interest rates from their currently punitive 5.25% to 5.50% range to a minimal 0.25% reduction during their March 20 meeting. For instance, in a poll of leading Fed-watchers, over 76% had expected such a cut before the CPI data came out. Now, only 46% expect such a 0.25% cut on March 20.

The U.S. Dollar (and Gold) are Still the Major “Safe Haven” Investments

A strong U.S. dollar is also putting pressure on gold. To date, the dollar is the preferred safe haven for investors as tensions rise in the Middle East and the participating nations proliferate. The U.S. dollar index is up 1.8% so far in January, accounting for virtually all of the 1.7% decline in the dollar.

Here’s a small sample of nations that are now taking part in the war that began three months ago during an attack by Hamas against Israel. These are six new participants so far this month: The U.S. and Britain attacked Houthi rebels in Yemen. Also, Iran launched a missile strike in the Kurdistan region of Iraq on what they said was the “espionage headquarters” of Israel’s Mossad intelligence service. Then, last Thursday, Pakistan conducted targeted strikes against militant hideouts in Iran that reportedly killed 20 militants. These are just some examples of how Middle East tensions can spread to neighboring countries.

So far, the U.S. dollar has been the major “safe haven” investment but more and more investors in these Middle Eastern countries will turn to their primary, proven safe haven of gold as these tensions escalate.

Gold Retreats

Gold retreated due to the prospects of high interest rates for a longer time and a higher-than-expected Consumer Price Index. The odds of the Fed making its first rate cut of 2024 on March 20 fell from nearly 80% to under 50% when the CPI was reported rising more than expected.  Gold also fell sharply on the CPI report but the Fed’s more moderate Personal Consumption Expenditures (PCE) Index will be released Friday, January 26, and it could help lift the prospects of a Fed rate cut coming this March.

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