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.
6/4/2019: Turning Point - Gold Climbing Again
In this issue:
Slowing global growth
Cheap money is good for gold
Gold & silver recommendations
Gold is climbing again, reacting to falling bond yields as the cost of money has become cheaper. Economic growth is slowing in China, Japan, Europe, and the US, hampered by the escalating trade war with China and the threat of new tariffs on Mexico.
The past two weeks have seen a palpable shift in sentiment away from risk assets and towards the safety of gold and government bonds. Gold tends to climb a wall of worry, and its rally from recent lows of $1,270 to $1,330 this week suggest there's an increasing amount to be worried about.
Slowing global growth
While US consumer sentiment and spending have stayed relatively strong, buoyed by record-high stock markets and the strongest job market in 50 years, key parts of the economy are trending in the wrong direction. Orders for durable goods plunged 2.1% in April, largely because of falling demand for cars and trucks. Business investment eroded nearly 1%, with the yearly pace dropping to 1.3% from 3.8%. Both are forward-looking metrics.
Further clouding the outlook, IHS Markit's manufacturing index plunged to a 9-year low in April, largely on trade-war anxiety. Perhaps more worrisome, the services index hit a 3-year low. Including banking and retailing, the US services sector employs around 80% of all US workers. And the ISM reported American manufacturers grew in May at the slowest pace in two and a half years.
Last year's stimulus of $1.5 trillion in tax cuts and a blitz in government spending have clearly left the building. After growing at a 2.9% clip in 2018 and 3.1% in the first quarter of 2019, GDP is projected to increase by less than 2% during Q2 and not much more afterward. Corporate profits grew at merely 2.8% in Q1, the biggest decline in 4 years, and are projected to decrease further as the trade war deepens.
Other major economies are also struggling. China is mired in slowest growth in years despite an unprecedented easing program in Q1. Its official manufacturing PMI fell into contraction last month as trade headwinds grow. Eurozone GDP growth has fallen to 1.5% for the past two quarters. And Japan's manufacturing also fell into contraction in May, with GDP growth projected to be under 2% in Q2.
Adding to global worries, geopolitical tensions are on the rise. Diplomatic overtures to both China and North Korea have fallen apart in recent months, while the threat of US military conflict with Iran has grown. US national security adviser John Bolton accused Iran of seeking nuclear arms and sabotaging of four UAE oil tankers. Additional US troops and warships have been moved into the area.
And, of course, the uncertainty over Brexit drags on, all but ending PM Theresa May's government and destabilizing financial markets in Britain and the Eurozone.
An old saying goes, the smart money follows bonds. Clearly, today's bond market is saying take shelter. Bond yields are falling everywhere as investors are piling into safe-haven assets like government debt and gold. In the past month, the yield on benchmark U.S. 10-year Treasury notes has rolled over sharply from 2.5% to 2.10% today, which is less than the 3-month Treasury yield of 2.3%, resulting in an inverted yield curve.
The yield curve, which measures the difference between the yield on longer-term Treasury notes and their shorter-term counterparts, usually slopes upward because investors demand higher compensation for tying up their money for a longer period. But when investors think the future will be less profitable than the present, that curve inverts.
This sharp decline in the 10-year yield and inversion of the yield curve is spooking investors because it is seen as a reasonably reliable indicator of coming recession. According to the Federal Reserve Bank of Cleveland, an inversion of the yield curve between 10-year and 3-month Treasurys has preceded the last seven recessions with only two false positives.
Many traders have been looking for a yield-curve inversion as a bullish signal for gold. Now it's happening, and not just in the US. In Germany, the economic engine of Europe, 10-year rates have gone negative again, steepening their inverted curve. Same in Japan. Benchmark yields in Britain the Australia have been cut nearly in half since November.
Cheaper money is good for gold
With global economies slowing, cheap money is coming back into vogue, and that's good for gold. The ECB is expected to hold negative interest rates until 2020, at least, and talk of further quantitative easing is making the rounds. The Swiss National Bank is expected to cut its rates further into negative territory as investors bid up the safe-haven franc.
Here at home, the Fed is overwhelmingly expected to cut rates by December, perhaps more than once. Based on Fed funds futures trading, CME FedWatch now forecasts a 98% likelihood that rates will drop by December, with an 86% likelihood of two rate cuts by then. Lower rates typically weaken the dollar, boosting gold in turn by making it less expensive overseas.
Wall of worry, indeed. All three major US stock indexes fell around 7% in May, while gold rose 2%. But we think this is just the start of gold's rebound. With the world bracing for the possibility—perhaps inevitability—of global recession, money is flying to safety and gold is catching an increasing share of that bid.
Gold's recent climb to $1,330 caught many by surprise. Last week, gold punched through psychological resistance at $1,300 after President Trump tweeted his intention to increase tariffs on Mexican imports by 5% per month until they seal our border. Follow-through buying this week has pushed gold as high as $1,330 so far.
As the chart below shows, gold loves cheaper money. After seven interest rate hikes in two years, the Fed changed course at the end of 2018, signaling a more gradual approach to future rate hikes. That was great news for gold. Higher rates tend strengthen the dollar by inviting foreign exchange investment seeking higher yield. In turn, the stronger dollar pressures gold and other commodities priced in it for global trade by making them more expensive overseas. Lower rates reverse this dynamic.
Signals that the Fed’s tightening policy would slow last December caused gold to rebound sharply, completing an impressive rally to $1,290 after having dropped below $1,200 earlier in the fall. With the economy struggling to begin the year, the Fed became even more dovish at the February meeting, effectively saying any further rate increases would depend on data. Two years of systematic, Fed-driven headwinds for gold were officially over.
On the back of this news, gold rallied further, punching up from $1,300 to $1,347 and heading back towards major upside resistance at $1,370, gold's upper bound since 2014. Although it got close, gold was unable to pierce that limit. Then, as stocks rallied on better economic data and hopes for an end to the trade war with China, complacency overtook the gold market. The price held a channel between $1,270 and $1,320 with a downward bias from March to early May.
Things changed again in mid-May, however, as global recession fears took the bond market by storm, driving down yields on safe-haven government debt and deepening the yield-curve inversions we discussed above. The longest and weakest post-recession expansion on record is obviously faltering, and on a global level. This gives us reason to believe gold may finally take the next leg higher, surpassing major resistance at $1,370 on its way to $1,500, and perhaps this year.
If bond yields continue to fall, we expect gold to continue its current rally. If the Fed acknowledges global economic weakness by cutting rates sooner than expected, perhaps more than once, gold should react with sharp moves higher, as it did in December and February.
Gold is clearly catching the fear bid in the world today. As the ultimate currency of last resort with no counterparty risk, it is leading this cycle. Silver, platinum and palladium are lagging because of their use as industrial commodities. If the economies of the world slow in unison, as we believe they will, industrial demand will slacken further.
An easy verification is to look at the price of copper, the one of world’s most widely used industrial metals. Copper prices are down about 5% in the last 30-days. This is another sign of a global economic slowdown.
It remains to be seen whether gold can continue to run as hot as it has over the past two weeks. We'll will be watching bond yields and the Fed very closely. An unexpected rate cut at the June Fed meeting would be a huge booster for gold. Rising Treasury yields led the Fed to raise interest rates through last summer. Falling yields are just as likely to lead the Fed lower. We think it's only a matter of time.
Silver is completely underperforming relative to gold in the current market. The gold-to-silver ratio stands at 90:1, the highest since 1993. In other words, the price of gold is now 90 times that of silver. While gold is closing in on its major upside resistance level, silver has a much longer road to travel until it breaks out, as you can see in the chart below.
Technically, silver enjoys support at the short-term low of $14.30 and upside resistance at $15, and again at $15.75. To reach its 42-month equilibrium, silver must regain $15.75, above which it spent most of the past three years. This move would confirm silver is finally moving higher in earnest. A move above $16.20 signals a potential breakout to the upside.
From a relative value standpoint, silver is very inexpensive. At these depressed prices you can certainly make money on silver in the short term, but you'll have to be patient. For now, silver is pricing more like an industrial metal than a safe-haven currency. But if gold breaks out above $1,370, we'd expect silver to rally in sympathy, catching more of gold's safety bid.
One of our major concerns is that unprecedented debt levels in the world today make the global economy more susceptible to systemic shocks and catastrophic "black swan" events that lead to currency devaluations or even national defaults. Should this occur, silver prices will skyrocket because silver is your trading currency. For real portable wealth, gold is your metal of choice. But for daily spending in a currency crisis, silver is what you want. At today's prices, it makes sense to put some away for a rainy day.
Gold & silver recommendations
If you are new to gold investing or simply wish to add to your core gold bullion holdings, we have quantities of minty-fresh Backdated US Gold Eagles, BU. Dated 2018 and earlier, they are available as low as 2.75% over the spot gold price in quantity, which is cheaper than the US Mint charges dealers for 2019 dates! The best buy in modern bullion gold, bar none (pun intended)!
For more seasoned buyers, premiums on Pre-1933 US Gold Coins are as low as we have ever seen them in our 39-year career. If you want private, non-reportable, historical gold that offers leverage to the underlying gold bullion price, you can’t find anything better than the following recommendations:
Pre-1900 $10 Liberty, MS61 - If you are just getting started with classic US gold coins and want something historical, scarce, and low in price.
$20 Saint-Gaudens, MS62 - For bulk gold buyers looking for low-priced Pre-1933 US gold coins.
$20 Liberty MS64 - For the highest leverage via scarcity at a low price today with an amazing previous track record.
Silver is extremely inexpensive today relative to gold, making it a terrific value. We recommend the following in the current market:
US 90% "Junk" Silver Coins - For physical silver premiums on junk 90% pre-1965 US silver dimes and quarters are back down to cyclical lows so there are great values in junk 90% silver now.
1-oz US Silver Eagles, BU - If you want sovereign-minted silver, nothing beats the world's most popular silver bullion coin!
That's it for now. As always, thanks for your time and your business!
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