"Award-Winning Metals Market Report: February 2016 - Week 2 Edition

Mike Fuljenz
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Posted: Feb 10, 2016 12:01 AM
"Award-Winning Metals Market Report: February 2016 - Week 2 Edition

Gold is up over 12% in the first five weeks of 2016, while stocks are down 9% in the same time, giving gold a 21% advantage over stocks. Gold opened on Monday morning (February 8) by touching its $1200 price from the start of 2015, thereby making up for all the losses from last year. The dollar is not the major cause, since the dollar index is down only about 2% this year, so gold is rising in terms of all major currencies. In addition, gold and silver are doing far better than most other commodities, especially oil, so this appears to be a pure “fear” play in gold – a safe oasis from the decline in stocks. With interest-rate yields from banks and bonds falling to near zero, gold is the safest “sidelines” play in a dangerous world.

Money is Moving OUT of Stocks and INTO Gold

January was good for gold and bad for stocks, but February is even better for gold – and worse for stocks. In January, there was a 10% “gap” between gold and stocks, but that gap more than doubled in early February, with gold sharply up and stocks retreating rapidly, especially last Friday and this Monday. The gap between gold and stocks more than doubled to 21% as of Monday (gold up 12% and stocks -9%).

Here is a comparison of asset classes as of last Friday, according to the weekend Wall Street Journal:

There is a direct correlation between the decline of stocks and the rise of gold. Stock-based exchange-traded funds (ETFs) sold a net $16 billion in stock shares in January, while precious metals ETFs added $1.2 billion in the same month. Roughly speaking, that means about 7.5% of stock ETF sales went into gold ETFs in January. This trend accelerated in the first days of February. For the week ending February 4, 2016, an additional $888.7 million moved into the SPDR Gold Shares (GLD), the biggest gold ETF.

This trend is important since gold ETFs have often been the “tail that wags the dog” in the gold market since the introduction of gold ETFs in 2004. Since the gold ETF speculators often trade rapidly and on margin, their action magnifies any gold market moves, up or down. During gold’s strongest years, there was massive net buying for gold ETFs, but in April 2013, the gold ETF market turned on a dime and there has been net gold ETF selling over the last three years:

If we keep seeing net gold ETF buying in 2016, we could see a reversal in the price of gold this year. That’s important because a gold bull market breeds more gold bullion coin buyers, who will later move up to numismatic coins. This is a time for buying gold coins, not selling them. In addition, historic times of a declining stock market are often the best times to accumulate rare coins. In the 1970s and 1980s, the three worst stock markets generated the three strongest surges in gold and even larger increases in rare coins, as measured by the PCGS 3000 Index.

(1) From January 11, 1973 to December 6, 1974, the Dow Jones Industrial index fell 45.1%. Gold rose from $63.84 at the end of 1972 to $183.77 at the end of 1974, for a gain of 188%. In those same two years, the PCGS 3000 rare coin index rose much faster, 348%.

(2) From September 21, 1976 to April 21, 1980, the Dow declined 25.2%. Gold was trading as low as $103 in September, 1976, and it grew to $850 in January, for a gain of 725%. But the PCGS 3000 rare coin index grew faster, up 1,195% from 1976 to 1980.

(3) In 1987, the Dow fell 36% in less than two months, from August 25 to October 19, 1987. Gold rose from $340 to $490 from mid-1986 to the end of 1987, for a gain of 44%, but the PCGS 3000 rare coin index grew much faster, up 665% from 1986 to 1989.

Physical Sales at the U.S. Mint Also Rose in 2015 and 2016

The U.S. Mint reported that Silver American Eagle coins set a new record sales total of 47,000,000 ounces in 2015. Sales in January 2016 totaled 5,954,500 ounces and the first week of February topped one million ounces, at 1,045,500 ounces, or seven million ounces in five weeks. Gold American Eagle sales reached 801,500 ounces in 2015, a 53% increase over the 524,500 ounces in 2014. January 2016 totals were 124,000 ounces. That’s a 53% increase over the 81,000 ounces of Gold American Eagle coins sold in January of 2015.

With both physical and paper gold demand rising in early 2016, we could see a new bull market in gold.

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