February 2012, Week 3 Edition (Published by Texas Coin Company Universal Coin, an Award-Winning Gold and Rare Coins Dealer)
Gold rose 4 of 5 days last week, with a down day on Thursday, when the dollar rose strongly to the euro, after Moody's Investors Service lowered its credit ratings (or outlook) on nine European nations. Former euro-strongholds like Austria and France now have negative outlooks. Also, the euro-zone's GDP fell at a 1.3% annual rate last quarter. Italy contracted at a painful 2.9% annual rate, while Belgium, Greece, the Netherlands and Portugal entered a recession, with their second straight quarter of negative GDP growth.
Gold is Strong in Terms of the Depreciating Euro
When gold peaked at $1900 per ounce last September, the euro was trading at $1.46 per dollar, so gold cost 1300 euros per ounce. Today, the euro is $1.30 and gold is $1723, so gold has actually risen to 1325 euros per ounce. The U.S. press talks about gold's bubble "popping," but gold is still rising in Europe!
- Gold 52 weeks ago (February 21, 2011): $1403.00
- Gold's average price during 2012: $1684.21
- Gold's London Low for 2012: $1590 on January 3
- Gold's London High for 2012: $1751 on February 2
Last Week In Metals: Gold rose $12 per ounce, while silver and platinum were flat and stocks rose by a little over 1%.
What's the Next "Game Changer" for the Gold and Coin Market?
Over the long-term, the familiar fundamentals will lift the price of gold in terms of the dollar. There is a flat or slow-growing supply of new gold, vs. massive new demand, pushing the price relentlessly up. But from time to time there are major events, trigger points, amounting to game-changers in the gold market.
There Were Two Separate Gold Bull Markets in the 1970s
The 1970s provided us with two game-changing events - separated by a 50% consolidation in 1975-76. At first, gold grew gradually after Nixon closed the gold window and currencies began to float, but then a big game-changing event came in October, 1973, with the Yom Kippur War and the OPEC oil embargo.
Bull Market #1: August 1971 to December 1974
| YEAR | AVG PRICE | CHANGE |
|---|---|---|
| 1971 | $40.80 | +13.52% |
| 1972 | $58.16 | +42.54% |
| 1973 | $97.32 | +67.32% |
| 1974 | $159.26 | +63.65% |
Maximum Gain: $35 to $200 (+471%) in 3+ Years
Bull Market #2: Sept. 1976 to January, 1980
| YEAR | AVG PRICE | CHANGE |
|---|---|---|
| 1977 | $147.71 | +18.32% |
| 1978 | $193.22 | +30.81% |
| 1979 | $306.88 | +58.72% |
| 1980 | $612.56 | +99.74% |
Maximum Gain: $103 to $850 (+725%) in 3+ Years
The trigger events of October 1973 (war, OPEC and Nixon's "Saturday Night Massacre") sent gas prices soaring. Gold followed. A year later, the legalization of gold for Americans was announced in August of 1974 (taking effect December 31, 1974). As a result of these triggers, we endured a decade of inflation and slow growth, or "stagflation." Gold rose sharply in 1974, from $100 to $200 an ounce. (Note: As a result, from 1972-1974 an important 3000 rare coin index rose 348%).
Gold began rising gradually from $100 to $300 during Carter's era, but the big trigger for gold's fastest upward explosion came November 4, 1979, with the taking of over 50 U.S. hostages in Iran, in the midst of another oil crisis, resulting in gas lines across America. Then came the Soviet invasion of Afghanistan on December 27, 1979. Within weeks, gold doubled from barely $400 to over $850 in January of 1980. (Note: As a result, from 1976-1980 an important 3000 rare coin index rose 1,195%).
Gold's Dark Ages Ended With Another Big Game Changer: "9/11"
Gold traded between $300 and $500 for 20 fairly peaceful years during the Reagan and Clinton decades. Then came another big Game Changer - the September 11, 2001 attack on America. The day before, on Monday, September 10, 2001, gold closed at $271 per ounce, followed by a modest rise to $293 (+8%) by the end of September, 2001. Then, the ensuing War on Terror helped keep gold rising during its long bull market.
Gold first broke $1,000 per ounce on St. Patrick's Day of 2008, but then it fell to $712 in the fall, due in part to that year's financial crisis: 2008 turned out to be gold's weakest gain (+4.3%) in the last decade. You would think a financial crisis would help gold, but in retrospect we can see that gold seemed to be waiting for the 2008 elections and the Federal Reserve's reaction to the crisis. As it turned out, the Fed flooded America with liquidity and low interest rates, which helped gold. Huge federal deficits followed.
The day before Obama was elected, gold closed at $729. Since then, the price has more than doubled. Last September's peak seemed to be caused by speculators rushing into the futures market and ETFs, but speculators always react to some external event. It turns out that central bank buying was the big Game-Changer in the third quarter of 2011. According to the World Gold Council, central bank buying hit a 40-year high last year. Central banks bought 14.1 million ounces of gold (440 tons, over 20% of annual supply) in 2011 vs. just 2.5 million ounces in 2010. This trend could continue in 2012 as paper money loses value.
And now, what are some of the new big Game Changers that could strike in 2012? By their nature, Game Changers are unexpected, so the truth may come as a shocker, like 9-11.
Future Game Changers - and their Potential Triggers
Trigger #1: Israel attacks Iran
Game-changing response: Iran fights back with an oil blockade
Israel's Defense Minister Ehud Barak has already talked openly about the necessity of striking Iran before Iran buries its nuclear facilities underground, beneath layers of concrete. U.S. Defense Secretary Leon Panetta said that these strikes could come as early as this spring. While not totally unexpected, such an attack could trigger a game-changing event like 1973, another oil embargo - this time initiated by Iran.
Last week's issue of Barron's (February 13) interviewed George Friedman, head of the widely-respected national security research service, Stratfor. In that interview, he said that the chances of an Israeli strike on Iran's nuclear facilities this year are "one-in-four." If it happens, he says, Iran would likely close all sea traffic in the Persian Gulf at its exit point, the Strait of Hormuz. About 20% of all global oil passes through those Straits. Friedman says, "Oil at $300 a barrel would be a heavy price to pay" for delaying (not stopping) Iran's nuclear ambitions. To Friedman, a far more important drama is boiling over in Syria. If the Assad regime survives, he says, Iran could launch conventional rockets far closer to Israel. (Note: In my opinion, there is a 25% or higher chance that gold, oil, gasoline and many rare gold coins will rise in price by 50% or more in a year for many of the same reasons we saw in the 1970s.)
More Game Changers Next Week
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