As we close 2016, gold will likely rise for the full year, but stock indices will likely beat gold in 2016 for the fourth straight year. From 2001 to 2012, gold beat stocks each year. Then, stocks beat gold for the last three full years. Early this year, gold easily beat stocks, but since the surprise election of Donald Trump in November, stocks soared and gold retreated. The end of 2016 looks a lot like the end of 2015, when the Fed raised rates in mid-December and promised to raise rates several more times in the coming year. When that didn’t happen, gold rose.
Trump’s Election Boosted the Sales of Many High-Priced Coins
While gold bullion has declined since the November election, demand for extremely rare coins has risen. There’s a growing sense of optimism among entrepreneurs and collectors I talk with that business and income will generally improve during Trump’s presidency. This seems to be manifesting itself in a surge of high-end numismatic sales that is atypical for December. Shortly after the election, for instance, one major Texas dealer sold all eight $50 gold pieces he had in stock. A California dealer also told me there has been a resurgence in demand for coins priced at over $100,000. Perhaps this new demand is based on the fact that high-end customers believe that business will be better and high-end collectibles will soar in price.
We’re also awaiting the official Donald Trump presidential inaugural medal, expected to be available before his January 20 inauguration. The sale of official inaugural medals began in 1901 for the second inauguration of President William McKinley. There is an active collectors’ market for presidential memorabilia that many coin dealers and collectors now offer. Private mints compete for the contract to produce the official inaugural medal. The winner of the contract can strike and sell medals in different sizes, metallic versions and set combinations approved by the Inaugural Committee or a subcommittee.
Russia and other Central Banks are Accumulating Gold
The fourth quarter of 2016 will likely be the strongest quarter of the year for central bank gold purchases. According to the British-based bank, HSBC, Russia bought 31.1 metric tons in November, following 40.4 metric tons in October. That’s 71.5 tons in just two months – in just one nation. Russia’s October gold purchase was their largest monthly gold accumulation since 1998. Russia has been steadily building its gold position for over a decade. According to the International Monetary Fund, Russia now owns the sixth largest national store of gold in the world after the U.S., Germany, Italy, France and China.
So far in 2016, Russia has added 168.5 metric tons, and China is has added 80.3 metric tons. Looking back over the last decade, Russia more than quadrupled its gold holdings, from 12.5 million in early 2006 to over 50 million ounces at the latest count (November 2016). In the last 13 years, China tripled its gold holdings from 600 metric tons in 2003 to 1823.3 metric tons at latest count. They have profited from gold’s greatest price rise, from $400 in 2004 to $1130 today. While most of the established Western central banks (in Europe and the U.S.) have not added any gold reserves, the two former Communist powers of China and Russia are rapidly “catching up” to the West in terms of central bank gold holdings.
Reforms in India and China could Spur a 2017 Gold Revival There
One of the biggest reasons why gold failed to rise in the second half of 2016 is the short-sighted move by the Indian government to try to kill the cash market for gold purchases there. This short-sighted policy could be repealed in 2017. In addition, the cost-conscious Indian public tends to buy more gold when the price is down, so gold imports turned up in November, rising over 23%, due mostly to the much lower price of gold in November. If India’s government softens their anti-gold stance, this rally could continue.
India’s Modi government has raised gold import taxes three times since 2016, but it looks like they are now considering a reduction in gold import taxes from 10% down to 6%. These high import duties were designed to stop gold smuggling, but they only ended up making smuggling more lucrative. The Modi government also tried to stop smuggling by withdrawing large (1000 rand 500 rupee) bills, but this has caused great confusion and a slowdown in economic growth in several areas besides gold. Any revival of a more rational policy in 2017 will likely include lower tariffs and a revived Indian domestic gold market.
China has been the #1 nation for physical gold demand, after Indian demand retreated to its lowest level in seven years. But Chinese demand has also been down due to the high premium prices on gold charged in most Chinese exchanges. Late this year, demand in China is on the rise due to the weakening Chinese yuan and bubbles in their real estate and stock markets. As a result, the Chinese are willing to pay higher premiums – amounting to about $31 an ounce (2.7%). Gold prices are down by more than $31, so gold buyers in China are seeing a relative bargain at current prices as gold offers insurance against devaluation.