golinoBy Louis Golino for CoinWeek

It’s been quite a while since I devoted a column to the precious metals scene.  I feel now is an appropriate time to do so because recent developments in gold and silver prices seem to be significant enough that they may have longer-term implications for bullion investors.  Silver is at a four-year low, and gold is at its lowest point of the year and just above its low for the last several years of $1188.  Plus changes are coming to the way the metal exchanges function.

These developments are also important for coin collectors and investors because as always precious metal prices play a key role in shaping the market for numismatic coins.  Declining prices for metals tend to depress the coin market for all segments except ultra-rarities, which is happening now.  As my colleague Patrick Heller wrote recently in Numismatic News dealers have stopped buying some categories of U.S. coins altogether, which is unusual, and prices for key date coins not in high grades are dropping fast.

I would have to agree strongly with Mr. Heller’s view that buyers are likely to be able to get some great deals in the coming months on numismatic items.  With both coins and metals we are really in a buyer’s market, one with lots of potential for long-term holders.  The weak hands who have to sell their precious metals or numismatic holdings at these levels are likely to regret it in the coming months and years.  But those who can afford to add to their holdings at these attractive levels will in my view benefit handsomely down the road.

britanniaIn fact, while writing this article I came across the best deal I have seen all year for some low-mintage Britannia silver and gold Lunar privy coins at wholesale prices.  The dealer was able to offer this because of the deal they got when buying the coins, which I suspect was the result of a major investor who was forced to sell.  I love these opportunities because it gives one the chance to buy at wholesale levels coins that on the retail market sell for 50% or more of the offered price for the silver examples, and 25% over spot for the gold.  If the coins temporarily lose their retail premiums, that is not a problem because the level they were priced at when purchased, which for the silver was even less than American silver eagles and about the same as gold eagles for the gold coins.

So let’s first review why prices have fallen so much in recent months.  There are a couple of key factors.  First, despite some recent increased volatility in the equity markets, those markets have continued to outperform all year as they have for most of the past five years, which has produced a five-year bull market, one of the longest in U.S. history.  Analysts are divided between those who think the market reflects the improvement in the U.S. economy and that asset prices are fairly valued, and those like metal bulls and people who are bearish on the long-term macroeconomic outlook, who think the stock market is overvalued and could soon suffer huge losses.  Whichever view is right, the fact is that the stock market’s bull run has taken a lot of money and momentum away from the metal markets.

Second, the dollar is at a four-year high against the dollar and euro, having increased 7% against those currencies in the last couple months, according to Barry Stuppler, former ANA president and long-term coin dealer.  There are two reasons for the dollar’s strength.  The first is the fact that the U.S. economy is substantially outperforming those of other countries.  It also reflects probably to an even greater extent the divergent monetary policy paths of the U.S. Federal Reserve and the European Central Bank.  While the ECB is lowering short-term lending rates to combat the prospect of deflation (inflation is running at multi-year lows in Europe), in the U.S. the Fed continues to move closer to tightening, or increasing those rates because of the increased pace of the economic recovery and some incipient signs of rising prices.  Most analysts expect some increase in rates next year, though it is likely to be a modest increase.  Higher interest rates have the effect of increasing a currency’s value relative to other currencies because it makes it more attractive for investors to put their money in dollars.  Of course it has the opposite effect on trade, but that is another matter.

dollar_euroAs anyone who has followed precious metals markets over time knows, a stronger dollar translates into lower gold prices and silver usually follows gold.  If you believe that prices are at or near their bottom for now, then buying both metals at current levels makes sense.  And silver at today’s level of $17, or 1/70th of the price of gold, seems especially attractive.  Premiums over melt for coins are also at very attractive levels but if prices rise and supplies get smaller, expect premiums to increase.  This has a lot to do with the simple fact that many people buy when prices are rising because they think they will miss out if they don’t act.  Of course they should actually buy when prices are declining like now, but a bear market turns buyers off.   However, experienced investors understand this, and demand for bullion coins sold by the U.S. Mint and other major world mints has been very solid recently.

Hitting the bottom in prices, wherever that may be, is key since rapid upward reversals tend to follow the reaching of a bottom in metal prices, especially after a protracted period of declining prices like during the past two years.  $1200 seems to be what most experts believe is the key support level for gold, so watch to see if it manages to go below that level.  I would think $17 is a fair bottom for silver.

September and the autumn and winter months are historically the period of the year when gold and silver tend to do well.  Recent months have also seen a lot of increased international tensions from Russia’s annexation of Crimea to the troubling situation in the Middle East.  Metals have failed to rally off these developments, which suggests to metal bulls like Mr. Heller that the U.S. government is working overtime to suppress prices.

There are also some important changes to the U.S. market exchanges for precious metals that begin on October 1 as a result of provisions in the Dodd-Frank Act.  These changes will give investors with leveraged accounts who used to have three to five days to find the money to cover margin calls only one day to do that.  As Mr. Heller has explained in several recent articles. including this one in CoinWeek in September, this change will make silver and gold prices even more volatile than they have been recently.  Over time this will result in more margin calls and will likely result in higher prices because there will be fewer chances to profit from declining prices through short-selling.

Finally, we are on the cusp of the marriage season in India, when demand for gold surges.  Large amounts of the yellow metal are being imported now into India in anticipation of the expected major increase in demand for gold in India in the Diwali season that runs through next May.

Over the long run, demand for gold and silver in China, India, and other countries in Asia is widely viewed by analysts as being of far greater significance than short-term, mostly monetary policy-driven trends that push short-term paper gold prices down.

It’s going to be an interesting autumn for precious metals!

6 COMMENTS

  1. My hats of to you, love the article!
    To think that I have been entertaining the thought of liquidating some of my collection.
    I think now that I should take another avenue, I didn’t like that idea anyway. Keep up the good work!

    • Thanks so much, Dusty! Glad it was useful for you and hope my advice pans out as I am following the same path. I would not recommend it if I were not willing to do the same.

  2. It’s evident you have have been doing some digging, I think you have come up with something good. The economic environment we live in today is a very interesting one. I’ve wondered if we could see a correction like what was seen in 1987, but I

  3. doubt it could be duplicated given the unique environment. I have to hand it to you, I’ve known people who will refrain from stepping out an giving advice involving money, your advice though is undeniably rooted in some good common sense. I, as always will be careful about where I spend my money, I am drawn mostly to numismatics, and yes, in upper grades, but we very well may be at the point of changing gears into bullion.

  4. I have been thinking about investing in gold or silver in the next coming months. Good to know as you point out that it is currently a buyers market for precious metals like silver. That means I can get a good price on silver, and then be able to sell in down the road for a better price. Thank you for the great article on gold and silver.

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