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.
8/7/2019: Gold breaks out above $1,500
In this issue:
Gold loves cheaper money
From trade war to currency war?
Current gold chart
Gold has been on a tear, breaking out above $1,500 and hitting a series of a new six-year highs as slowing global growth, cheaper money, and escalating trade wars drive global investors into safe havens. The metal has now gained more than 17% since early May. In this brief Gold Commentary, we'll focus strictly on gold and the underlying reasons why it has risen so strongly in recent months.
Economic data in the major economies has weakened in the past 90 days, especially manufacturing. The Markit Global Manufacturing PMI and the JP Morgan Global Manufacturing PMI both entered their third month of contraction in July, signaling a recession in this important sector. Of the 30 nations with available data, 19 were in downturns, including China, Japan, Germany, South Korea, France, and the UK.
Although US manufacturing has yet to fall into actual contraction, it is getting close. The ISM reported manufacturing fell to a three-year low in July. The Markit PMI fell to 50.4, where below 50 means contraction. Escalating trade wars and falling demand overseas have taken their toll on US factories, and that does not bode well for growth.
While comprising around 12% of US GDP, manufacturing is widely considered the leading forward indicator of economic health. Cyclical in nature, the sector is highly responsive to changes in the outlook for trade, business investment, and corporate profits--all of which have softened substantially in recent months.
Gold loves cheaper money
Global central banks, especially in Europe and Asia, are becoming more dovish. The ECB is expected to cut interest rates in September and has opened the door to more quantitative easing, an asset-buying program designed to stimulate growth with cheap money. The Bank of Japan, with negative interest rates since 2016, said last week it "will not hesitate" to add further stimulus if needed. The Bank of Korea cut rates last month.
In response, the Federal Reserve reduced interest rates for the first time in 10 years, hoping to inoculate the US economy from slowing global growth, trade conflicts, and a relatively strong dollar. This is a very bullish development for gold. Lower US interest rates pressure the dollar by making it less attractive to foreign exchange investors seeking higher yield. A weaker dollar, in turn, supports gold and other commodities by making them less expensive overseas.
The Fed's rate cut puts downward pressure on Treasury yields, which were already falling. In early May the 10-year US Treasury bill yielded 2.52%. Today that yield is 1.73%. This is a huge 79 basis point decline in a short three months.
During the same period, as you can see in the chart below, yields on British and Japanese government bonds have also dropped sharply. The German 10-year Bund yield fell 55 basis points, from +0.03% to negative 0.51%. Globally, yields have fallen sharply across the board since early May as investors have bought bonds in a flight to safety, driving yields increasingly lower in the process. Now they are buying gold, too.
When yields are low, gold has an easier time competing for investment monies because it does not produce a yield. As an asset unto itself, gold gains or loses value relative to the currency it is held in. Today, gold is setting record high prices in many foreign currencies including the British pound, Japanese yen, Canadian dollar, Australian dollar, and Indian rupee.
Global investors are not the only ones fleeing to the safety of gold. Central banks are buying gold in record amounts, adding nearly 225 tonnes to global reserves in the second quarter. Year to date, they've bought nearly 375 tonnes, the most ever in the first half of a year, according to the World Gold Council.
Like individual investors, central banks buy gold to diversify their holdings, lower risk, and hedge against devalued currencies.
From trade war to currency war?
And now, with the US-China trade war entering a dangerous new phase, we're facing the real threat of a currency war. This week, China slashed the value of the yuan to under 7 per dollar, the lowest level since the financial crisis of 2008. The move came in retaliation for President Trump's surprising decision to impose new 10% tariffs on an additional $300 billion in Chinese goods.
Although China stepped in the next day to stabilize the yuan, the message was clear: its currency may become a weapon in the trade war. Analysts are concerned that other nations may follow suit, devaluing their currencies to keep their exports competitive in the current low-growth environment.
If that happens, we could see a race to the bottom, with central banks flooding the globe with easy cash like they did after the global financial crisis. Gold rose to an all-time high above $1,900 in 2011 on that tsunami of cheap money. And it looks like money could get a lot cheaper in coming months, which would be very bullish for gold.
Current gold chart
As you can see on the one-year chart, gold has rebounded this year in two phases. Starting from cyclical lows under $1,200 last fall, it rose towards major resistance at $1,370 in February. After consolidating through much of the spring, it began the second phase in May, rising through $1,400 in June, up to $1,450 in July. This week the rally has supercharged, punching above $1,475 on Monday and above $1,500 today.
The primary driver of both phases of this impressive rally has been US monetary policy. Last December, the Fed indicated that it was planning to slow its program of regular rate increases. In February, the Fed became even more dovish, effectively saying any further rate increases would depend on data. Two years of systematic, Fed-driven headwinds for gold were officially over.
As global bond yields began to fall in May and money literally became cheaper worldwide, gold began to climb in earnest towards a true breakout. We saw it coming in early June, sending out a Gold Commentary calling it a turning point in the gold price. When the Fed telegraphed, in its June meeting, that a rate cut could come in late July, gold was off to the races.
Over the last several years, gold has mostly traded within $75-dollar price bands. For the past four years, the major resistance level has been $1,370. So, when gold pushed through that key level in late June, we anticipated resistance at around $1,445, with a new trading range from $1,375 to $1,450. Sure enough, leading up to the Fed's late-July meeting, gold did trade in this range, and it encountered upside resistance $1,445.
What came next was a little surprising. After the Fed came through with a quarter-point rate cut, gold pulled back to just above $1,420. It was a classic example of the adage, "buy the rumor, sell the fact." Traders took profits from the metal's rally to new six-year highs, perhaps disappointed that the central bank did not cut rates more aggressively.
The next day, however, President Trump shocked financial markets by announcing an additional 10% tariff on $300 billion in goods from China, sharply ratcheting up tensions between the world's two biggest economies. China vowed to retaliate with countermeasures "to protect the country's core and fundamental interests," and devalued the yuan. Gold promptly punched above $1,475 and then $1,500.
This lightning-fast move tells us gold has room to run towards $1,550. If the Fed takes China's bait and cuts rates again in September, we could see sharply higher prices. If the trade war morphs into an outright currency war, gold will be the biggest winner as the world's currency of last resort.
Once again, gold is being driven by a host of forces today, including cheaper money, falling global bond yields, escalating trade wars, and slowing global growth. It has shown remarkable strength already, surging faster than many expected to achieve a series of new 6-year highs. As we've said before, the trend is your friend, and gold's trend is solidly upward!
If you are interested in adding to your physical gold holdings, we have the following available at lower than normal pricing.
Modern Gold Bullion
We've never been able to offer 1-ounce America Gold Eagles at such a low premium over their intrinsic gold content, and very well may never be able to do so again. Take advantage of this unusually low pricing for the most popular bullion coins in the US. These are minty-fresh pre-2019 coins, dated 1986 to 2018. Dates of our choice. While supplies last.
European Gold Coins
European and world gold coins are an overlooked but very promising sector of today's gold market for bulk gold investors and collectors. Minted mostly pre-1935, these classic gold coins from many nations offer all the benefits of modern gold bullion coins plus extra benefits like limited supply, collector demand, financial privacy, and extra premium potential because of scarcity.
Premiums are unusually low right now on the following coins, making them an outstanding bargain. While supplies last we have available at 6% over melt value:
George V British sovereigns are the most popular and widely available of the classic gold sovereign issues. Minted from 1911 to 1933, their classic design features a portrait of King George V on the obverse and an equestrian St. George, England's patron saint, on the reverse, in his mythic defeat of the Dragon. Similar in size and weight to modern 1/4-oz American Gold Eagle bullion coins.
Swiss 20-franc Vrenelis (also called Helvetias) are among the least expensive world gold coins, trading at a modest premium over modern bullion coins. The obverse depicts Vreneli, the charming Swiss Miss of proverb, framed against the majestic Alps. The reverse features the traditional coat arms of Switzerland with the famous Swiss cross and wreath of the Republic.
Pre-1933 US gold coins
We've been fortunate to have a lot of options in the pre-1933 US gold coin sector this year at record low premiums and prices. With the gold price rising, however, choices are narrowing fast. These low-supply, high-demand coins are being bought up from the national market. Here are two of the best values currently available.
Very limited availability. Raw (non-certified) $20 Liberty gold coins in AU condition are superb substitute for gold bullion. Minted more than a century ago, they're in severely limited supply today and contain nearly a full ounce of pure gold. Yet they trade for relatively small premiums over their underlying gold value, making them a great buy in bulk gold.
Trading at their lowest premium over melt, just 14% over gold content, these beautiful near-gem-quality coins have seldom been more attractively priced for potential future gains. Only 646,856 survivors are known in near-gem Mint State 64 condition (PCGS + NGC, 07/08/2019), all dates included. This scarcity can mean bigger gains in a rising gold market. Traded for $2,375 each in late 2012! Supplies are limited.
That's it for now. As always, thanks for your time and your business!
AGE Daily Gold Update
Gold fell 0.5% today following the release of yesterday's Fed minutes that implied the Fed was modestly less dovish ... read more