AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.
10/14/2015: Gold breaks out in solid uptrend!
China contagion and the Fed
Downtrend in U.S. data
Ever-receding rate hike
Charts and changing trends
Great values in classic gold coins
After being pressured for months by a strong dollar and expectations of a rate hike from the Fed, the gold market is now signaling an important reversal of trend. The yellow metal has surged more than 6% so far in October, gaining in every session but two. Jumping 2% today, it powered through major resistance at $1,160 to reach $1,187, the highest level since late June. Gold is now in a technical breakout with room to run as high as $1,225 before hitting major resistance.
With the start of the Hindu festival season, gold is entering its seasonal period of highest demand in India, which typical feeds back into higher global gold prices. And the greater seasonal appetite is not restricted to India: almost half of worldwide demand for physical gold occurs during the fourth quarter of the year. Given the shift in underlying fundamentals that we outline below, we think gold has passed through a major cyclical bottom and is now into a solid uptrend.
China contagion and the Fed
The Federal Reserve had been telegraphing for months that the first rate hike in nine years would come in September, pressuring gold and supporting the dollar. Yet when the time came, the committee voted 9 to 1 to postpone once again, citing "recent global economic and financial developments." What changed? In a word, China. During the preceding weeks China's economy posted its slowest growth in a generation, undermined by plunging exports, falling global and domestic demand, a bursting real estate bubble, stiff credit, and other problems. The solution? More monetary easing. China slashed the value of the yuan by nearly 4% in one day, causing near-panic in global financial markets.
China sneezed and the world caught cold. Since July, stock markets have been roiled by China's deepening economic weakness. The Shanghai Composite Index, which had more than doubled in less than a year, plummeted over 40%. The FTSE 100 Index fell over 10% in the UK; the DAX in Germany fell over 20%. At home, the Dow fell from a May peak of 18,312 to under 16,000 in August and it recently retested that low.
As the minutes from September's FOMC meeting made clear, the Fed sees China's slowdown and its devaluation of the yuan as serious risks to the U.S. recovery. With the ECB and BOJ cheapening currencies because of weak growth in Europe and Japan, China's malaise has the potential to boost an already-strong dollar, which would hurt U.S. exports, undercut factory output, stifle inflation, and, in turn, slow job growth and erode GDP.
But the ripple-effect of a stronger dollar would go even further. Emerging market countries, many of which carry large U.S. dollar debts, would see their debt burden rise with the value of the dollar at a time when their economies are contracting. In Latin America’s six largest economies the average growth rate has fallen from 6% in 2010 to around 1% this year. Brazil’s central bank recently acknowledged that the country’s recession is far worse than expected. And as their economies have contracted, their debt burdens have exploded. The IMF estimates developing nations—led by China—may have over-borrowed by roughly $3 trillion and could face a wave of corporate defaults. Many firms borrowed heavily in dollars. As the greenback surges against the value of local currency revenues, repaying those loans becomes increasingly difficult.
Downtrend in U.S. data
Unfortunately, all of the Fed's concerns in September have been realized. Since that meeting, U.S. manufacturing posted its worst performance in more than two years, plunging nearly into contraction in August, and regional Fed surveys for September were even worse. The trade deficit surged 15% in August as exports tumbled, victimized by the too-strong dollar and weaker demand overseas. Consumer inflation fell for the first time in seven months and wholesale prices fell 0.5% in September, leaving Fed's target inflation rate of 2% nowhere in sight. Import prices dropped 1.8% in August, down 11.4% year-over-year. Meanwhile, retail sales flat-lined over the summer and real GDP growth, according to the Atlanta Fed's GDPNow forecast, has fallen to just 0.9% in Q3.
Perhaps most damaging, the September jobs report came in shockingly weak at 142,000, nowhere near consensus forecasts of 200,000, while totals for the prior two months were revised lower by 59,000 jobs. The unemployment rate held at 5.1% but the labor-force participation rate fell to the lowest level since 1977, indicating more workers are giving up the search than can be squared with an aging demographic. And hourly wages actually fell, belying the argument that a tightening labor market would elevate wages and therefore inflation.
Ever-receding rate hike
The upshot is, the Fed was smart not to raise rates last month and probably won't until well into 2016. While some Fed members continue to debate in speeches the merits of a hike this year, the market says it won’t happen until March. The CME FedWatch tool, which monitors trade in Fed fund futures, puts the odds of a December hike at just 37%, while March 2016 is at 58%.
Commodity prices, beaten down to multi-year lows by the strong dollar, are now rising again as the dollar retreats. Copper and oil are firming up, as is silver. After setting a cyclical low in late July, gold is rising with gusto, hitting a three month high this week. With its strongest season ahead of us, gold's prospects look very good to finish the year in a solid uptrend.
Let's look at the latest charts
Charts and changing trends
As the global slowdown feeds back into the U.S. economy, the dollar's year-long march higher has stalled. As you can see below on the Dollar Index chart, since peaking at just over 100 in mid-March, the buck has set a series of lower highs against a flat, two-tiered bottom. After surging to a 12-year high over 12 months, a correction was overdue and now has arrived.
With the blue trend line defining the lower highs since mid-March, we see short-term support for the dollar at just under 95, which has been broken as we go to press, and major support at just over 93. If the dollar breaks lower, the next major support level will be found at just under 88, but we doubt it will be tested in the short-term. Further erosion will most likely be choppy, stair-stepping to lower highs and lower lows. But the dollar's clear bias in the short-term is to the downside, and that's bullish for gold.
Absent a major international crisis (like the one brewing in Syria), the two major influences on gold in coming months are likely be quarterly U.S. GDP reports and monthly U.S. jobs reports. Their relative strength or weakness will lead the Fed's decision on when to hike rates. But remember, the Fed has stated explicitly that the first hike, whenever it comes, will be small—a quarter-point—and subsequent hikes may be few and far between.
In other words, accommodation will remain the rule in monetary policy for a long time to come, and that's bullish for gold. As we said above, the window for a hike this year has probably closed. With manufacturing and exports hurting, GDP in Q4 is unlikely to improve much on the Q3 falloff. What's more, Q1 growth has been horrible for the past six years, sometimes even dipping into contraction, like it did in Q1 of 2014. If 2016 is true to form, the first rate hike could easily be pushed back until June 2016.
As you can see in the chart above, after bottoming at $1,084 in early August, gold has set a series of higher lows against short-term resistance at $1,160. As we go to press, gold has surged as high as $1,187, firmly over $1,160 resistance, which is a significant move. While the blue trend lines still show a downward trend in place, the move above $1,160 signals real price strength and the start of a bullish reversal in trend.
Upside resistance at the psychologically-important level of $1,200 is now within reach, with the next technical resistance at $1,225. Short-term support holds at $1,120 and $1,100, with major support at $1,080. The bias now is clearly to the upside, but trading will likely be choppy. Fundamentally, gold is looking stronger than it has in the last two years, which is why we believe a true trend-reversal is at hand.
Silver has been more volatile than gold over the last several months, which is normal. After breaking support at $15.50 in sympathy to gold's plunge in mid-July, silver set what appears to be a major bottom of $14.08 in late August, and has been rising since. But a lot has happened in the silver market in the interim.
Silver’s move under $15 triggered one of the largest buying waves we've witnesses in our 35 years in these markets. Buyers simply overwhelmed supplies, creating a worldwide shortage of physical silver. For the first time, the “paper” price for silver got low enough to contradict the price for “physical” silver, something we thought we'd never see.
To give you some context, for the last six years, the U.S mint has produced an average of 8.6 million ounces of silver Eagles from June through August. This summer demand nearly doubled to more than 15.3 million ounces, and the Mint still has not caught up with orders. The other sovereign mints have similar stories. China, Austria, Mexico, Britain, they all went into deep delays. The Royal Canadian Mint, usually one of the world's most reliable sources of bullion coins, almost completely stopped deliveries.
The global financial crisis in 2009 created a supply shortage but it was nothing like this. That squeeze affected only the U.S. Mint and lasted about 60 days. The current silver shortage is much broader, affecting virtually every mint and manufacturer in the world, and has lasted for three months. Delays in delivery of one-ounce coins from government mints have been 90 days or longer, depending upon the mint. Premiums for immediate-delivery coins have doubled. While the pressure is starting to ease now, premiums for deliveries delayed by 30 or more days remain well above normal.
This overwhelming supply-and-demand dynamic tells us that silver has a very solid bottom under $15. It also tells us that the low Comex contract “paper” price didn’t matter all that much if the world is eager to pay $4.00 or $5.00 above it for silver you can hold in your hand. The world’s appetite for hard assets grew exponentially following the financial crisis of 2008, and we're seeing that hunger again in the current silver market.
As you can see in the chart above, before the July dip, silver traded in a fairly steady range from $15.50 to $17.50 for the previous 12 months. We think this range is back. After surging over $15 in early October, it has been moving steadily higher and is currently testing resistance at $16. In fact, as we go to press, silver is now over $16. From here resistance steps higher in 50-cent increments to $17.50, where major upside resistance lies.
We see short-term support at $15.50 and major support at $14.50. Going forward, it is unlikely that silver will drop below $14.75, or even $15. The amount of demand created by the sub-$15 drop was truly stunning, and the short-term bias for silver is now clearly to the upside. $16.50 is the next upside resistance level, with major resistance at $17.10.
Platinum and palladium have both moved substantially above major bottoms in the last two months. While both metals fell with all commodities in August, palladium’s swoon was particularly strong, breaking major support at $590 and falling to $531. Since that bottom it has rebounded very sharply, especially as VW’s diesel debacle hit the markets. Palladium is more widely used in diesel engines, platinum in gasoline engines. In the short-term, sentiment for diesel engines has soured, which means demand for gasoline engines—and platinum—could reap the benefit.
Palladium's recent surge to over $700 makes the August low of $531 look like a major bottom. But the unprecedented nature of the diesel-emissions scandal makes it difficult to ascertain where industry demand for palladium ends and speculation begins in the current market. The palladium market is smaller, or more thinly traded, than the platinum market, so short-term pressure will be more evident in its price. For the past five years, the metal has traded primarily between $600 and $900 per ounce. From 2012 through 2013 it was mostly between $600 and $750, last year mostly between $750 and $850.
Going forward, we expect palladium to establish major $75 trading ranges, as it has in the past, with short-term moves staying within these ranges. Like gold and silver, the bias continues to be to the upside. We see support at $675 and upside resistance at $750, with movement likely to be choppy near the extremes. If palladium can move above $750, which seems likely, the next-higher $75 trading range of $750 to $825 comes into play.
Platinum is now rebounding off of a major, cyclical low of $906 set in late Sept. As you can see in the chart below, its downtrend since the beginning of 2015 had been severe. It's all the more surprising because Johnson Matthey, a major platinum refiner, projected a supply deficit of 1.133 million ounces this year.
Platinum has traded at a discount to gold for most of the year, which is something that happens at times, but rarely for so long and to such a degree. When the VW diesel scandal broke and platinum dropped to the $906 low, it opened the widest gold-to-platinum ratio in 15 years, reaching $225, or about 20%. While the gap has narrowed, it remains around $170 today.
More important, platinum rebounded sharply and is now in a technical break-out above $975, testing psychological resistance at $1,000. In the short-term, we see support for platinum at $950. Upside resistance is at $1,020 and, above that, $1,080. At a discount of $150 or more to gold, platinum looks cheap!
Great values in classic gold coins
U.S. Gold Coins
After hitting cyclical lows earlier last spring, classic U.S. $10 and $20 gold coins in MS63 to MS64 are on the rise. Prices and premiums remain near historic lows, however, making these coins outstanding values that should not be passed up.
$20 Saint-Gaudens gold coins in MS64 are currently trading for just $15 more than their MS63 counterparts, which is astounding. The spread between these two grades is typically $100 to $150! For literally a few dollars more, MS64 Saints are a steal today.
Higher-grade $10 gold coins are a deeply overlooked sector of the market right now. $10 Liberty in MS65 and $10 Indian in MS65 are currently trading at around 40% of previous market highs. During gold's recent bottoming phase, buyers were focused more on quantity than quality, buying physical bullion instead of scarce, classic coins. In recent weeks, the gold price has been rebounding but prices for these gorgeous, gem-quality coins has yet to catch up. At their previous market peak, a pair of these super-scarce, gem-quality coins traded for close to $16,000. Today, that pair can be had for just over $6,000. They offer a superb buying opportunity in today's market, one that will not last long, so get them while you can!
European Gold Coins
Supplies of classic gold coins from Europe have become more dependable since the resolution (perhaps temporary) of the crisis in Greece, and premiums have returned to normal. That’s great news for bulk gold buyers looking for non-reportable, trading-sized gold coins with gorgeous designs, historical significance, and the potential for additional premiums because of scarcity.
We have a small cache of British Sovereign “Kings” in BU condition, the most popular of all classic European gold coins. These are highly recommended and not always available in quantity these days, so get them while they last:
And we also have a handful of scarce French 100 Franc “Angels” in AU condition. These are hefty coins are dated 1886 and feature the magnificent “Guardian Angel” design. The last time we were able to secure a group of these the sold out in a matter of hours!
That’s all for now. Thank you for your time and business!
Dana Samuelson, President
Bill Musgrave, Vice President
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AGE Gold Commentary
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