So far in 2017, gold is up 3.8% vs. only 0.6% in the Dow Jones index, but the New Year is still young. Gold reached $1,200 last Thursday for the first time since November 22, 2016. After dipping below $1,200 on Friday, gold returned to over $1,200 on Monday – as America honored the birthday of Martin Luther King Jr. In between, gold’s low was $1,127 on December 15, one day after the Federal Reserve raised interest rates. This happened at almost exactly the same time a year earlier, when gold bottomed out at $1,049 on December 17, 2015 – which was also a day after the Fed raised rates by 0.25%. When the Fed failed to raise rates again for most of 2016, gold rose rapidly – and it could do so again in 2017.
The World Gold Council Sees Six New Positives for Gold in 2017
The World Gold Council (WGC) just published its “Outlook 2017,” which outlined “six major trends [that] will support demand for gold throughout 2017.” Here is a summary of the WGC’s latest report:
1. Heightened political and geopolitical risks: “Political risk is rising. Europe will be holding key elections in the Netherlands, France, and Germany in 2017. As John Nugée [former Reserves Chief Manager at the Bank of England] says, this election cycle will happen ‘against a backdrop of continued citizen unrest, fueled by the ongoing uneven distribution of economic welfare. In addition, Britain must negotiate its exit from the European Union.” In this environment, gold is a proven crisis hedge: “As a high-quality, liquid asset, gold benefits from safe-haven inflows.”
2. Currency depreciation: WGC said that “over the past century, gold has vastly outperformed all major currencies as a means of exchange. One of the reasons for this is that the available supply of gold changes little over time – growing only 2% per year through mine production. In contrast, fiat money can be printed in unlimited quantities to support monetary policies.” At the same time WGC said, “central banks continue to acquire gold as a means of diversifying their reserves.”
3. Rising inflation expectations: “An upward inflationary trend is likely to support demand for gold for three reasons. First, gold is historically seen as an inflation hedge. Second, higher inflation will keep real interest rates low, which in turn makes gold more attractive. And third, inflation makes bonds and other fixed income assets less appealing to long-term investors.”
4. Inflated stock market valuations – Stock market “valuations have been elevated, as investors increase their risk exposure in search of returns in a very low-yield environment. Until now, investors have used bonds to protect their capital in the event of a stock market correction as rates rise, this is a less viable option.” The “risk of a correction may be increasing…. In such an environment, gold’s role as a portfolio diversifier and tail risk hedge is particularly relevant.”
5. Long-term Asian growth – “In Asian economies, gold demand is generally closely correlated to increasing wealth. And as Asian countries have become richer, their demand for gold has increased.” The WGC quoted David Mann, Chief Economist for the Asia Standard Chartered Bank as saying “Asia will account for around 60% of global growth in 2017.” Although gold demand in China and India – the world’s top two nations for physical gold demand – has suffered over the last year, mostly for political reasons, Asian demand could return in 2017. Meanwhile, “other markets such as Vietnam, Thailand, and South Korea have vibrant gold markets, too.”
6. Opening of new markets – “Gold is becoming more mainstream. Gold-backed ETFs made gold accessible to millions of investors…but other markets continue to expand, too. China has seen dramatic growth in recent years through Gold Accumulation Plans, physically-settled gold contracts in the Shanghai Gold Exchange. In Japan, pension funds have increased their gold holdings” and, perhaps most importantly, the new Shari’ah Standard for gold could become “the most significant event for Shari’ah finance in modern times,” according to Dr. Mark Mobius.
2017 Gold Price Projections were Mixed -- Again
In the December 26, 2016 issue of Barron’s – their last issue for 2016 – their Commodities column carried the headline, “The End of a Gold Era.” They quoted some leading Wall Street banks like Bank of America, which said that Fed rate hikes will be “a key head wind to gold.” Their analysts probably are not aware that gold rose strongly (+50%) the last time the Fed raised rates multiple times (2004 to 2006).
In their December 26 Commodities column, Barron’s admitted that Wall Street traders generally sell near bottoms: “During the week of December 8-14, 2016, gold funds experienced a $700 million outflow while equity funds attracted $21 billion, their ninth largest total ever.” In 20/20 hindsight, that is the week before gold reached its late-year low of $1,129 and the Dow Jones stock index reached an all-time high of 19,975, so those who sold gold to buy stocks seemed to suffer from the worst possible timing – again.
Outside the U.S., some leading banks are more positive in their gold views, perhaps because gold tends to rise faster in most foreign currencies – including the weak Canadian dollar. Last week, The Bank of Nova Scotia (Scotiabank) said gold has bottomed out and could be a safe haven from a coming stock market correction. ScotiaMocatta’s monthly Metals Market report for January said, “We think there is a strong risk of the [stock] markets having to undergo a reality check in the weeks and months ahead.” They are also concerned about the repercussions of Brexit “and a possible correction in the massive bond market.”
They conclude: “The sell-off has been severe, but prices appear to have found a base, which is well above the 2015 low. Given considerable geopolitical uncertainty as the new administration takes the helm and potentially overbought equity and bond markets that may face a deeper correction, we think the correction in gold prices means it now offers a relatively cheap safe-haven…in the weeks and months ahead.”
What’s Hot in 2017
While gold bullion declined immediately after the November election, demand for extremely rare coins rose. 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.
As we enter 2017, I expect demand to continue to increase for coins with something special. That could be blast luster or a needle-sharp strike or a paucity of bag marks on key focal points. Key-date and historical coins are always in demand. For example, many dealers find it hard to keep 1794-to-1796-dated copper, silver and gold coins in stock, even in lower grades.
Key coins like 1870-CC double eagles seldom last long in inventory in any grade. Silver coins with original attractive toning are popular. Spectacularly toned examples can bring multiples of what an untoned coin in the same grade would sell for.
Coins in popular collector series at or near the scarce end of the PCGS and NGC population reports can trigger fierce competition, and bring significant premiums over the same type coin graded just a point lower. At a recent 2017 convention I could not find one acceptable MS-66 $2.50 Indian for our customer wish list. This is true in part due to rarity, but also in part to collectors wanting to have top-rated sets.