By Louis Golino for CoinWeek
Ever since last Wednesday, June 19, when gold began its second major drop of the year, market pundits and analysts have been weighing in on why gold has declined so much and what the prospects are for the future.
The decline was set off by a widely-anticipated Federal Reserve Bank statement that said that provided the American economy continues to improve in the coming months, the Fed may begin reducing its bond buying program known as quantitative easing, or QE, later this year and could end it in 2014.
Nothing about that is new or unexpected, and the fact that it sent stocks, bonds, and precious metals down so sharply is a clear sign of two things: one, the economy is much more fragile than most people realize, and two, all of these markets have been on a kind of sugar high driven to a considerable extent by the easy money of QE.
If this is what happens when the Fed simply re-states what it has been saying for months, imagine the chaos that is likely to ensue when it actually does end QE, and when it eventually raises interest rates. Both actions will happen eventually, but only after the economy is on much firmer ground and inflation picks up as the economy does so.
The notion, expressed by some writers, that QE can never end is in my view absurd for it implies that the economy will never get better, in which case we are all really doomed, and it also overlooks the fact that the Fed simply cannot endlessly expand its balance sheet. But I do believe that easy money will be around for longer than most people currently believe it will, which is part of why I see the market reaction of the past week as so irrational.
As for gold and silver, the past week has been especially brutal. Gold is down to the level is was at in September 2010, and is having its worst quarterly performance since 1920 and its biggest decline since 1981.
Gold and silver are without question hugely oversold, and the precious metal markets are engaging in liquidation driven by fear rather than reason, but in the near term I believe the down trend will continue as more people exit the trade and downward momentum feeds on itself.
$1,000 would appear to be the floor, as that is the average current cost to produce gold. When it goes below those levels, mining companies will stop mining it. While it is true gold prices are driven more by market sentiment than by supply and demand fundamentals, I do think $1,000 will be the key level to watch.
The current sell-off is different from the one that started in April because this time so far physical buyers are not jumping in to the same extent.
That can be seen in several ways. In India gold import taxes are up sharply and the wedding gold buying season is over. China has already stockpiled a lot of the yellow metal and is dealing with a slowing economy and liquidity issues.
In addition, so far dealers and the U.S. Mint are not reporting backlogs in supply and are able to meet current demand. I think most buyers realize prices are likely to fall further, so there is a weight and see attitude.
If you are a long-term investor, there is no need to panic.
This is a good time to add to your holdings at attractive prices, especially since premiums remain reasonable, unlike in the spring. The same is true of silver and silver premiums.
If you have been waiting to finish your gold type set, or buy that MS65 St. Gaudens double eagle you have always wanted, now is a great time to do so as long as you are not using money you need in the short-term.
Another factor that must be thrown in the mix is a disturbing trend, especially in Europe, to discourage precious metal ownership.
First, on May 23 France quietly passed a new law that received no media attention within the country, which makes it illegal to send or receive precious metals by mail. In particular, because of the new law, UPS, FedEx, and French mail are not allowed to ship precious metals to or from France.
This strikes the Coin Analyst as an odd move since for one thing the French Mint sells precious metals coins on its web site to French people and foreigners, though perhaps numismatic coins are exempt.
Second, as Barry Stuppler reported in his “Weekly Precious Metal and Rare Coin Report” for June 17, since September 2011 Austrian banks have been forced to restrict precious metal sales and to limit purchases to no more than 15,000 euros ($20,000) at a time.
He also notes that FedEx recently starting forbidding people in the UK and Germany from sending or receiving precious metals by mail.
In Mr. Stuppler’s views these legal restrictions on precious metal ownership have the potential to spread to other countries and “could easily go worldwide,” which he sees as another reason to take advantage of current attractively-low prices.
I am neither convinced this will become a global trend soon, nor do I see them, as many other commentators do, as a stepping-stone to gold confiscation, which I think would be impossible to implement today. But European governments already have more record-keeping and other requirements for precious metal purchases (such as no cash transactions in France) than many other countries do, and these are definitely developments to watch.
Another useful perspective is provided by metals analyst Jeffrey Nichols (http://nicholsongold.com), who writes about the “cloud of bearish expectations” that currently hangs over gold.
He points to the obituaries for gold that are being hastily written by those who see a future of nothing but low inflation, a rising dollar, low interest rates, and a Europe that gets through its sovereign banking crisis as heavily indebted countries move to sell off some of their central bank gold. This is a view that would make Dr. Pangloss proud. For those not up on their French literary references, Pangloss was a character in Voltaire’s Candide, who always saw the world through rose-tinted glasses.
As Mr. Nichols points out, the largest central bank gold purchases by far are those of Russia and China, and neither of them has plans to sell that gold for a very long time. The same is true of the rising middle classes in the emerging market economies, where buying and holding gold for the long term is a cultural tradition and not just a way to hedge against rising inflation in those countries.
As Mr. Nichols sees it, demand for gold in these countries “will be enough to move the metal’s price higher even if economic and investment conditions in the United States and Europe remain inhospitable to gold.”
There are a lot of myths about gold, such as the view that it does best as a hedge against inflation. In reality gold has done best when inflation remained low, at least in the U.S., over most of the past two decades.
Critics of QE have been saying it will create hyper-inflation since the program was launched. Time will tell whether it contributes to higher inflation when rates start moving up, but what is undeniable is that QE debases the value of the dollar. And currency depreciation may be the most important long-term shaper of gold prices.
At the moment all the major currencies of the world are in a race to the bottom in which each country seeks to keep lowering the value of its currency to promote that country’s growth through increased exports. Besides, now they have the extra incentive of devaluing to reduce the value of their debts.
It is true the dollar is temporarily stronger than other depreciating currencies, which always happens when markets go crazy and investors seek refuge in the dollar, but as consumers continue to lose purchasing power with their paper dollars, they will increasingly understand why a weak dollar matters.
I was at a dinner party recently and when I explained that I wrote about precious metals, someone I was speaking with seemed to take pleasure in pointing out that gold was down this year, apparently unaware that no asset class can always be up, as gold has been for almost every one of the past 20 years.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.
I just wanted to point out your comment about easy money. Where are you getting your facts from that easy money is now the norm ? Maybe the last year, money has been somewhat easier to obtain, but overall, getting credit for anything, has been extremely hard, even with most banks having made record profits, and having vast amounts of cash in their vaults. As I stated, maybe this last year or so, getting this easy money you say, being made available, isn’t so easy, but the few years after the banking debacle, and up to what my sources say now, easy money is still not happening. Although some things will be easier than others, and that is going to be with anything in business/etc., the era of easy money is not here, and I do not see any let up in this nationwide policy, or thinking. But the rest of your article I agree with. I just had another call from one of those gold dealers, this one being Roseland Capital. What a clown this fella was, trying to get me to buy as much gold as I could, to even sell my mutual funds to acquire it. I pointed out that some people may think the time to buy is now, but when this salesman or any others start making remarks that we are in the same atmosphere as we were two years ago when gold hit the high $1800’s, and try to persuade me and others that we better buy now, or else we are going to lose out on tremendous investment, well I said to him, ” that line actually works on people ?”. I pointed out a few facts to him, and he basically hung up on me, mainly for the reason he knew he wasn’t talking to a dummy, and his false hype and lies won’t work on a knowledgeable person. Gold will fall much more, in my opinion, and I do see it hitting the low mark of, maybe around the 700/800 area. Then I am all in.
On the West Point set, I was able to pick up 10 sets for $265.00. Not bad Louis, not bad. As far as my sources, it seems that the ER PCGS 70 graded sets, are fetching in the area of $280.00 or so. I know it is very early, but maybe those $400/500 prices we saw on the similar graded/PCGS on last years 2 coin silver set will not happen with this set, as many have hoped. You have more coins sold, and most likely more coins came back in 70’s.
Dave Shyster, take care…
Easy money is not a reference to ease of getting loans or credit. It is a term used by economists and people who follow the economy to refer to periods when the Fed has a policy of low interest rates. The rates the Fed sets are not the same as those determined by the market, such as home mortgage rates, which are starting to go up. Throughout the past 5 years it has been hard for most people to get loans, which has been a drag on the economy. But we are still in a period of easy money.
You’ve given us a nice overview of pretty much all the big developments in the past few weeks here. As always you’ve done an excellent job rounding up the current trends.
The notion, expressed by some writers, that QE can never end is in my view absurd for it implies that the economy will never get better, in which case we are all really doomed, and it also overlooks the fact that the Fed simply cannot endlessly expand its balance sheet.
It’s worth noting, however, that a significant number of gold investors believe precisely this – that QE essentially cannot end and that bankruptcy/currency failure are inevitable. This might help to explain the impetus behind some of the frantic panic buying we’ve seen as of late.
I also thought it might be useful to note that premiums and demand for physical gold remains sky high in India as per this story from Reuters: http://in.reuters.com/article/2013/06/26/markets-india-gold-idINDEE95P08I20130626
I am inclined to agree that $1000 is the price point to watch. I think the massive overbearishness in gold could drive the price down even further, but if mines begin cutting production or closing down, it will not be long before prices begin rising again due to supply constraints at a time of already huge physical demand.
As a gold buyer it is frustrating to see the value of my coins decrease, but at the same time I agree this situation also poses new opportunities for those who want bullion to add to their stack. A number of people I know are hoping for further price decreases so they can buy tubes of silver eagles and small-denomination gold eagles.
Thanks for your insightful comments.