Gold is Still the “Star” of the Commodity Universe

Mike Fuljenz
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Posted: Jun 29, 2017 12:45 AM
Gold is Still the “Star” of the Commodity Universe

Despite falling to support levels Monday morning, gold is still up during 2017, which is more than you can say for crude oil or most other commodities.  Crude oil is officially in a bear market – defined as a 20% correction from its most recent high.  Looking at the overall commodity universe, the CRB Commodity index measures 19 leading commodities.  The CRB index was over 300 in early 2014, but that index was cut in half (falling below 155) as of January 2016, led by the collapse of oil prices, from over $100 per barrel in July 2014 to just $26 per barrel in January of 2016. Since then, the commodities market has recovered somewhat, but the CRB has fallen again recently, touching a low of 166 last week.  

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Crude oil is struggling through its worst first half of the year since the oil bear market of the late 1990s, when crude oil reached a low of barely $10 per barrel.  There is a huge and growing oil glut in the world, which keeps oil prices down.  

While crude oil supplies are in an over-supply situation, the mining of new gold is starting to decline, due to the closing of many marginal gold mines after the gold price collapsed from 2012 to 2015.  Gold will always be harder to find and extract than crude oil, and since crude oil dominates our energy-hungry global economy, there will always be a demand to consume what oil exists until mankind finds an economically viable alternative energy source – but there is no alternative for the monetary value of gold.

Macroeconomic Conditions “Quite Favorable” to Gold – Mitsubishi

Japanese banking giant Mitsubishi sees bullish signs for gold in the global macroeconomic picture.  The bank said the short-to-medium macroeconomic outlook looks supportive for the gold market.  

The bank’s analysts said gold took maybe more of a beating from the Fed’s June rate hike than was justified since everybody knew it was coming beforehand and the projected path of rate hikes is mainly the same as it was before the rate announcement.  In other words, there were no surprises that would make sense of gold’s post-hike sell-off.

There are certainly some sinkholes in the road ahead that gold will have to dodge.  “The emphasis by the Federal Reserve on shrinking the balance sheet does have the potential to make the macro environment less favorable to gold if it means that, with less demand from Fed reinvestment, the yield on U.S. Treasury debt rises,” Mitsubishi said.  “If inflation also remains stubbornly low, this would mean that real interest rates rise, thus increasing the cost of carry for non-yielding precious metals,” the analysts at Mitsubishi added.

However, all things considered, the outlook for gold is upbeat, the bank believes.  “Overall, despite the Fed ratcheting up the hawkish tone…we believe that macroeconomic conditions will remain quite favorable to gold over the short to medium term,” Mitsubishi said.

The bank pointed out that in addition to macroeconomic support, lurking geopolitical political factors favor gold as a safe haven hedge against risk, particularly uncertainties over Britain’s exit from EU.

Scarce Gold and Silver Coin Market Warming Up

With gold up in 2017, many devoted coin collectors and investors are becoming more aggressive in their efforts to complete high-grade sets, creating extra demand for the attractive and scarcer pieces we sometimes refer to as key coins.  Due to the competitive bids on scarce-to-rare gold coins, market prices are warming up.  While common-date $20 St. Gaudens gold coins are plentiful in many grades, the tougher-to-find gold coins like the 1908-S, 1909-S and 1912-S $5 Indians, 1908 No Motto, 1911-S and 1915-S $10 Indians, 1877-S to 1882-S $20 Liberties and scarcer Carson City Mint gold coins are on many customers’ want lists.  Attractive popular silver coins like low mintage 1892-1954 commemorative half dollars and Proof Morgan dollars are also being competitively sought.  When I am on buying trips, even offering 10% above the market often doesn’t shake as many scarce silver and gold coins loose as it did last year.   

A word of warning: I only approve and buy the better coins for our customers, coins with good detail, luster and color/toning.  The coins I reject, and the rejects of many other recognized coin experts, often linger on the market at discounted prices. Before you buy, make sure your coins are selected by a peer-recognized expert.

Silver vs. Gold in History, Focusing on This Week in 1893

The biggest political debate of the 1890s centered around the role of silver vs. gold.  Basically, the Western mining interests favored silver, since silver was the “poor man’s gold,” in that it was easier to trade in normal transactions for small dollar amounts.  The Eastern banking establishment favored gold.

In general, Republicans favored the gold standard and Democrats opted for a “bi-metallic” standard (in essence, favoring silver at an unrealistically high conversion rate). From 1868 to 1912, there were eight Republican Presidents and only one Democrat, Grover Cleveland, who served two non-consecutive terms.  

In 1890, the Sherman Silver Purchase Act obligated the U.S. government to use its gold to buy millions of ounces worth of coinable silver mined from Western states, placing a higher value on the silver than the free market justified. Meanwhile, President Benjamin Harrison (serving 1889-1893) and his Republican-led Congress had spent all of their $100 million Treasury surplus on programs favoring rich industrialists. This led to an erosion of federal gold reserves and rising inflation going into the next President’s term.   

Grover Cleveland returned to the Presidency on March 4, 1893, just as the gold reserves fell below their traditional minimum of $100 million.   In this week in history (June 21-27, 1893) the price of silver fell to 77 cents an ounce, down from 92.2. That put the melt value of an American silver dollar (Morgan dollars at the time) at merely 58 cents.  By the end of 1893, more than 15,000 businesses and 642 banks had failed. One in five city workers lost their jobs.  Prodded by President Cleveland, Congress repealed the Sherman Silver Purchase Act in October 1893. The collapse in the price of silver and elimination of the Sherman Act caused mines to shut down all over the West. The resulting Depression of 1894 lingered into the next election cycle, when Democrat William Jennings Bryan gave his “Cross of Gold” speech.

Then came the Klondike gold rush of 1897 – rescuing the American economy from a deep depression.