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.
2/7/2018: Gold Bullish in 2018
In this issue:
Physical Gold on Sale!
Gold has started 2018 with a bang, surging over $100 higher in six weeks, driven by a falling US dollar. Unlike 2014 and 2015 when the US economy was expanding at a faster rate than the Eurozone, for the first time in a decade, economic growth world-wide is increasing simultaneously in the U.S., Europe and Asia. In fact, growth in the Eurozone was 2.5% in 2017, outpacing US growth of 2.3%. The strengthening economies in the Europe have been the primary drivers of recent dollar weakness, with the euro gaining 3.75% and the British pound gaining 4.70% against the dollar in January.
Surging bond yields in the US and Europe are telling us that markets are starting to factor reflation into the economic mix, despite inflation targets remaining below their Fed and ECB targets. Oil is back up over $60 per barrel and hourly wages grew 2.9% in 2017, their most since 2009. Yields on U.S. 10- year treasuries are up 38 basis points this year, to as high as 2.85%, their highest level in four years. Yields on the German 10-year Bund are also up 30 basis points to 0.76%, their highest level since 2015. The era of cheap money is ending. Equity markets, which have thrived on low interest rates since 2009, are reacting negatively to these sharply higher interest rates while gold is holding very steady.
Normally, higher interest rates would buoy the dollar but in today’s post-financial-crisis world, financial markets are anything but normal. While economic growth in the Eurozone and the US was almost identical last year, their current monetary policies have been opposites. While the Fed has hiked interest rates five times since 2015 and began quantitative tightening last October, the ECB has continued quantitative easing without raising interest rates. Because of these policy differences, there is a 2.1% difference between the yield on US 10-Year treasury notes and German 10-year bunds.
But this divergence in monetary policy may be ending. Because of accelerating growth and rising inflation, the ECB has suggested that it will stop easing this year and perhaps raise interest rates. The Bank of England and the Bank of Japan are sending similar signals for the same reasons. As a result, the dollar has been falling relative to the euro, pound, and yen as markets see these currencies catching up to the dollar in their central banks' tightening cycles. This is clearly reflected on the U.S. dollar index chart.
To put the current dollar movement into proper perspective, we’ve expanded our time frame past our normal two years to five. By doing so we can see where the dollar index was in 2014, before it rose sharply beginning in the fall of 2014, when the U.S. economy was expanding at a much faster rate in the latter half of 2014 and 2015 relative to economic growth in the Eurozone and Japan. This GDP growth differential of 0.5% to 1.0% led to the surge on the chart that took the dollar index to above 93.50, the highest level since 2003.
As economic growth in the Eurozone accelerated last summer and fall, the dollar fell sharply, finding new and lower support and resistance between 91.33 and 94.86 during the last quarter of 2017. So far this year, the dollar has fallen sharply again to a new three-year low of 88.50. In the short term, we see the dollar stabilizing between 88 and 90 on the U.S. dollar index. The Fed meets again next month and is widely expected to raise rates another 0.25%. With bond yields rising ahead of their meeting, they have more natural room to raise rates than they have had in the past. For the first time in years markets are leading the Fed higher. And while this may buoy the dollar in the short term, the trend is your friend and the trend for the dollar remains lower.
Going forward, the dollar will be further impacted by relative economic growth and monetary tightening in the US, Eurozone, and Japan. Based on the stronger GDP coming out of the Eurozone and rising bond rates there, we would not be surprised to see QE ending sooner than expected. Should that happen, the dollar’s decline will certainly continue. Weakness in the dollar, of course, supports higher gold prices because gold is priced in dollars for international trade and becomes less expensive to users of other currencies.
Gold has moved sharply higher in the last six weeks as the dollar has weakened, extending a trend that began in December 2016. Since setting a second major bottom at $1,129.80 in December 2016, it climbed steadily throughout 2017 in a series of higher lows and higher highs. In December 2017, just before the last rate hike from the Fed, it set another higher low at $1,241.70. Its surge last month to $1,362.90 put the four-year, major resistance point of $1,372 back into play. In the current market we see short-term support at $1,325 and again at $1,295, with upside resistance at $1,350, and major upside resistance at $1,372.
Gold is increasingly poised to move over major upside resistance at $1,372, a flat-top major resistance point going back to the spring of 2014. We saw similar patterns between 2006 and 2007 (rising bottom from $550 to a flat-top of $700), and again between 2008 and 2009 (rising bottom from $800 to a flat-top of $980). In each case, when the rising bottom pushed over flat-top resistance points, gold quickly gained 15% to 20% in value thereafter. A break above $1,372 now would give gold the potential to move above $1,450 towards $1,500. In the current environment, we would be a bit more cautions in our expectations. But nonetheless, we believe gold is ready to take the next step higher in 2018 due to the weakening US dollar, burgeoning inflation, and our unprecedented government debt.
Silver continues to underperform relative to gold. The current gold-to-silver ratio is approximately 80 to 1, which at the very high end of the range over the last 20-years. In other words, silver is cheap relative to gold today. A gold-to-silver ratio of 60 to 75 means the value of an ounce of silver is more reasonably priced relative to the price of an ounce of gold. When the ratio is below 60, gold becomes a better or cheaper value relative to silver.
While silver enjoys a major rising bottom, it has set successively lower highs since the beginning of last year. As a result, it is developing a major pennant formation that is heading towards a point sometime this summer. Once a pennant formation reaches its point, that market usually breaks strongly either higher or lower and a new market direction is established. Since the trend for gold is higher, and gold and silver normally trade in sympathy to each other, this favors a rising silver price going forward and perhaps explosively so. As many of you know, when silver plays catch up, it can do so very sharply.
In the current environment, $17 continues to be the equilibrium point for silver. Silver under $17 is attractive and under $16.50 it is even more so. As you can see above, dips under $16.50 have been V-shaped and short-lived. Silver over $17.50 becomes rather expensive in this trading environment, in our opinion.
In the current market we see support at $16.45 with major support at $15.75. Silver will find upside resistance at $17.25 and again at the upper blue trend line at just over $17.50, with major resistance at $18.25 and again at $18.50. It must move over $18.50 to signal a major breakout and fall below the 2017 low of $15.42 to signal a breakdown.
Physical Gold on Sale!
As stocks surged to record highs over the past year, investors who bought physical gold as a hedge against disaster following the 2008 financial crisis have liquidated some of their holdings over the past two months. As a result, gold is on sale and premiums on all classic gold coins are now at unusually low levels in the national market place.
Modern gold bullion coins like 1 oz US Gold Eagles are selling as low as $29 over their intrinsic gold value. Even better, classic $20 Liberty double eagles and $20 Saint-Gaudens double eagles in Almost Uncirculated condition are trading at a few percentage points over their melt value. These coins normally have a bid that is higher than we are offering these for today, which effectively negates the buy/sell spread in a healthier market.
Premiums for higher-grade classic US $10 and $20 gold coins are also abnormally low. These pre-1933 gold coins offer the potential for greater leverage to their intrinsic gold value due to their overall scarcity. The $20 Liberty in MS63, with a total known survival rate of 285,000 coins, is trading at record-low premiums in the current market, less than 19% today. With a 10-year average premium of 63%, this coin would rise around $500 from today's low prices is premiums merely merely revert to their 10-year average of 63%. And that's with no change in the underlying gold price. This is a fantastic bargain that should not be passed up!
We believe this is the year gold will make its next leg higher towards $1,500. This is the perfect time to hedge against rising inflation and future stock market uncertainty. If you have any questions our market experts are happy to assist you with any questions you may have.
As always thanks for your time.
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AGE Gold Commentary
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