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.
12/8/2017: Gold's Bullish Uptrend Intact
World Awash in Cheap Money
Rising Risks of Global Debt
The Latest Charts
Pre-1933 Gold Coins on Sale!
As 2017 draws to a close, the renewed bull market in gold that began in January 2016 remains intact. Gold has gained nearly 9% this year, setting a series of higher lows and higher highs despite an abnormally strong US stock market. In a year when risk assets have clearly been favored, and perhaps irrationally so, gold’s sustained rise is quite impressive and augurs well for 2018.
The fundamental drivers behind the gold rally have been the falling dollar and rising global tensions, both of which may well persist in 2018. The buck fell around 9% in 2017 as exuberance over Donald Trump's election late last year gave way to the political reality of gridlock in Congress. While sizable tax cuts look increasingly likely, other important legislation has stalled. Perhaps most damaging for the dollar has been the lack of promised infrastructure spending, which would have stoked growth, stimulated inflation, and accelerated the pace of rate hikes from the Fed. Late last year, the dollar rallied sharply in anticipation of this spending, only to tumble this year as it faded from view. Tax cuts may help to pick up that slack and reflate the dollar, but their effect may take a while to be felt, especially with inflation remaining stubbornly below the Fed's 2% target.
Adding to dollar weakness, and boosting gold's safe-haven appeal, has been a sharp increase in geopolitical turmoil this year. North Korea's escalation of its nuclear weapons and ballistic missiles programs has put Japan and the US within range of catastrophic threat. This aggression, which has led to promises of mutual annihilation, is not going away. In the volatile Middle east, a royal purge within Saudi Arabia's power structure rattled oil markets and further destabilized a region already reeling from the Syrian war and the failures of Arab Spring. Iran's nuclear deal, decertified by the Trump Administration, now has a questionable future. And the US political landscape is riven by brutal partisanship and the shadow cast by Robert Mueller's investigation into election-tampering by Russia. This US turmoil has been a fundamental reason why the Japanese yen and Swiss franc—along with gold—have largely replaced the dollar as safe-haven currencies in 2017. We are living in interesting times.
World Awash in Cheap Money
The appointment of Jerome Powell to replace Janet Yellen as Fed Chair should further support gold next year. Considered a dovish-leaning moderate, Powell is expected to maintain Yellen's gradual approach to rate hikes and balance-sheet reductions, even letting inflation run a bit hot if needs be. As a result, negative real interest rates—that is, nominal interest rates below the rate of inflation—will remain in effect next year and well beyond. Negative rates are bullish for gold because they mean investors don’t lose purchasing power by holding gold instead of bonds that yield less than inflation.
Normally, in an environment of rising interest rates, gold would likely underperform. But today the opposite may be true. Gold may outperform because higher rates are likely to deflate bubbles in stocks and other paper assets, like bitcoin. Remember, rising interest rates in 2007 helped to puncture the housing bubble, which led to the financial crisis in late 2008, driving gold to an all-time high above $1,900 in 2011.
On the global scene, while the US economy has been slowly getting stronger, the Eurozone and Japan continue to struggle with the aftermath of the 2008 crisis and ensuing recession. Furthermore, Brexit is impeding recovery in the UK and possibly the Eurozone as negotiations over the "divorce" are gaining little traction. As we all know, central banks worldwide flooded cheap money into the world’s financial systems through quantitative easing to combat the crash. While the US ended its QE in 2014, the Eurozone increased its money-printing operation in 2016 and 2017, and Japan has never stopped. In the last two years alone, an additional $3.5 trillion has been added to balance sheets in these economies, increasing total central bank holdings by almost 40%.
Clearly, global cash spigots are still open and stock markets are drinking-in the flood. In the US, the Dow is up over 20% this year, setting new records almost daily in what many are calling a "melt up." Overall, global stock market capitalization rocketed by $15 trillion this year to a record 113% of global GDP. Set to turn in three consecutive quarters with GDP of 3% or higher, the US economy is having its best year since 2014. Yet wage growth and inflation remain stubbornly low. While the Fed has signaled a preference for higher rates, it is increasingly caught between a rock and a hard place. Raise rates too quickly and risk deflation or recession; continue easy money policies and risk spiking inflation and bursting asset bubbles in stocks and housing. We all know from recent experience that when bubbles burst, things can get very ugly, very fast.
Rising Risks of Global Debt
And then there’s the debt. In 2017, worldwide debt has risen to a record $226 trillion, more than 320% of annual global economic output. Total consumer credit in the US increased $20.5 billion in October alone, to a record $3.8 trillion. US corporations sold a record $1.75 trillion in bonds this year, yet more and more businesses are struggling to service loans. Against this debt-riddled backdrop, major central banks are preparing to end easy-money policies. As companies are forced to refinance at higher rates, debt service becomes increasingly problematic. Even from today’s abnormally low levels, rising rates can jeopardize the ability of businesses to repay their debt, especially in less-developed nations. In 2009, we saw what happens when banks fail. Countries, corporations, and consumers are so highly-leveraged and interlocked now that cascade failure on a global scale becomes a real possibility.
Of that $226 trillion in global debt, the US government holds over $20 trillion, which is equal to about 106% of our annual GDP. One major study recently found that when a country's debt-to-GDP ratio exceeds 90% for five consecutive years, its economy loses one-third of its trend-rate growth. US debt-to-GDP ratio has been over 90% for six years now, which suggests future growth above 3% is going to be difficult if not impossible. Japan’s debt-to-GDP ratio is a staggering 220%, and its economy has stagnated for over 25 years.
I was recently invited to appear on legendary author and investor Robert Kiyosaki’s Rich Dad Radio Show. In our show, aptly titled "Your Cash is Worthless," Robert asked me to discuss gold, its history as currency and its necessity as a hedge against currency devaluation in today’s debt-riddled world. Like my mentor James U. Blanchard III, Robert understood intuitively the need for gold all the way back in 1971, when President Richard Nixon took the US off the gold standard and ushered in present regime of fiat money. If you take a few minutes to listen to the program, you'll hear Robert talk about buying his first Krugerrand for $50 in 1972, as a hedge against the coming currency devaluation. A short seven years later, that same Krugerrand had appreciated 1,600% and was worth $850. Now there's a savvy investor!
In the current environment, gold is one of the few assets that remains reasonably and fairly-valued. Because it functions as a long-term store of value and currency of last resort, it can provide portfolio insurance against currency risk, bubbles in paper assets, political uncertainty, and black swan events. These conditions helped gold to achieve its solid gains this year, and they remain very much in place as we move into 2018.
The Latest Charts
In 2017, the US dollar has undergone some of the widest price swings I have seen in my entire 37-year career. After hitting 14-year highs just a year ago, it set a series of lower highs and lower lows in 2017 as euphoria over President Trump's election gave way to Washington gridlock. The major European economies, especially Germany's, started to gain traction for the first time in years. Money from abroad, which fled had to the US after the financial crisis, started migrating back home in earnest. Much of it went to Europe, knocking the dollar 15% lower against the euro alone from April to September.
On the way down, the dollar broke below major three-year support at 93.50, falling to a four-year low of 91.33 in September. In a nine-month period, the dollar plummeted from a 14-year high to a four-year low, a stunning fall for the world's reserve currency! Since that short-term bottom, the dollar has rebounded and settled into a 92 to 95 range on the U.S. dollar index chart.
This dollar decline is the fundamental reason gold, which normally trades inversely to the dollar, has enjoyed solid support in 2017. Relative to the strong dollar moves, however, gold has been more conservative in price-movement in 2017. This tells us that support for gold is coming from outside of the U.S. Why? Because gold should have fallen further than it did on the unusual strength of the dollar early this year. It also tells us investors worldwide are more complacent this year, as reflected in unprecedented rise in stock values. Still, gold was stronger in 2017 than it has been for several years, and the trend points higher.
Following 2016’s major bottom of $1,050 and Brexit-vote high of $1,372, gold has traded in a tighter range in 2017. But more important, it has set a series of higher lows and higher highs throughout the year. The higher lows are defined by the two blue trend lines on chart below. Starting the year briskly, gold climbed quickly from a cyclical low of $1,151 back over $1,200 by the end of January, a level it has held ever since.
After moving over $1,200, it mostly stair-stepped higher in $75 to $80 ranges, trading primarily above $1,245 for most of the rest of this year—as evident in the highest green support line on the chart. While the trading has been choppy, the trend has been upward. For most of the year, a hard top held at just under $1,300 until late summer, when North Korea detonated its first hydrogen bomb. Gold quickly broke over major resistance at $1,295 following that literally earthshaking event to set a new 2017 high at $1,351. The ensuing correction saw gold enjoy support at $1,270 throughout October and November.
For the third straight year, gold is again undergoing a December shake-up as the Fed prepares a year-end rate hike. Pricing pressure this year is exacerbated by the impending passage of major US tax reform. In each of the last three years, December's dip signaled a bottom from which gold rallied higher in the new year. We believe this time will be no different, proving to offer the best short-term buying opportunity for gold in the months to come for the host of reasons we’ve outlined above.
We see support for gold at the green $1,245 support line and we are testing it as we go to press. The next support level for gold is the major support line at $1,215 with support again at $1,190. In the current environment, a dip below $1,245, should it occur, would be a short-lived and should be exploited as a buying opportunity. To the upside, we see resistance at $1,295 and then major resistance at $1,351 and $1,372. If gold can move above $1,372, its four-year top, it will have room to move substantially higher. We highly recommend taking advantage of the current “December dip." It offers the best buying opportunity of the last six months, and perhaps of the next six, too.
Whereas gold has trended higher in 2017, silver has traded sideways, channeling primarily between $16.50 and $17.75 with brief forays above and below those levels. In effect, silver has bounced between two distinct two trading ranges, as defined by the three green and red support and resistance lines on the chart. The lower range has been between $15.80 and $16.95; the higher range between $16.95 and $18.50.
Silver has not enjoyed gold's status as a currency of last resort status this year, trading more like a commodity than a currency. And demand for physical silver has been lower than we have seen in any of the last three or four years. Safe-haven investors have clearly favored gold over silver this year and that is reflected in silver’s underperformance in 2017 relative to gold.
Silver is also experiencing a “December dip,” and it is bigger than gold's. This is to be expected as silver is typically more volatile. When it makes big price movements, they tend to be 30-cent to 50-cent increments. In the last seven trading sessions, silver has fallen from as high as $17.20 to as low as $15.70, or about 9%, which is a sizable correction. But keep in mind that it has fallen below $16.25 twice this year, and rebounded quickly. The current dip is offering an excellent buying opportunity; please take advantage of it while you can.
We’ve added blue trend lines to the silver chart that define the major tops and bottoms silver has set over the course of the last two years. These trend lines form a pennant that, if it continues, will come to a point sometime in 2018. A pennant formation traditionally leads to a breakout, either to the upside or downside, once it reaches the point. Based on gold trending higher we believe a pennant breakout will lead to higher silver prices. A move above $18.50 will signal a short-term breakout, while above the high of $20.70 will be a true breakout to the upside. In the short-term, we see major support at $15.70 and again at $15.25. Any price under $15.25 should be bought aggressively.
Pre-1933 Gold Coins on Sale!
Despite gold’s rising trend in 2017, demand for physical gold has been lower across the board. Money flows have gone into other more-speculative assets like stocks and even bitcoin. As a result, premiums for gold coins like Pre-1933 U.S. $20 gold coins and Pre-WWII European gold coins are abnormally low. The price differential between common modern gold coins and much scarcer classic Pre-1933 U.S. $20 gold coins is small to non-existent. This market abnormality has created a superior buying opportunity. Classic gold coins are truly on sale!
For example, for almost the same pricing and premiums as modern 1-ounce U.S. Gold Eagles, you can acquire Pre-1933 US $20 gold coins in Almost Uncirculated grade, or Pre-WWII British Gold Sovereigns "Kings" in Brilliant Uncirculated condition. Each of these classic coins has traded at significantly higher premiums over their intrinsic gold content in the recent past because their fundamental scarcity. As 37-year market veterans, we see tremendous value and opportunity in these markets today that we’ve seldom seen over the years. Our gold specialists are happy to explain the details and different opportunities to help you determine what might be best for your individual needs.
For bullion buyers who want the highest leverage at the lowest premium, we highly recommend the $20 Saint-Gaudens in MS64 grade today. Trading at about 16% over its gold content today, this coin has enjoyed premiums of 100% over its gold content in recent years. It's known survival rate of 578,000 is less than many single-year mintages of modern U.S. gold eagles! Because of its track record of substantially higher premiums in the past, the MS64 Saint-Gaudens offers the best combination of low price and high potential in the current market.
We also highly recommend $20 Liberty gold coins in MS64 grade in the current market. Trading at a 45% premium over gold content today, with a much lower survival rate of 119,000 total coins, this coin has enjoyed premiums of 250% in high demand markets. The $20 Liberty in MS64 offers a superior opportunity today at a modestly higher price.
We are also offering a year-end sale on US Morgan Silver Dollars in Brilliant Uncirculated grade, while supplies last. These are big, heavy silver dollars that helped to build the country in the 1880s, the likes of which were used in saloons and on railroads and stockyards back in the day. These are true pieces of history that you can hold in your hand. Plus, they make great gifts!
That’s all for now. Thank you for your time and business!
Dana Samuelson, President
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AGE Gold Commentary
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