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SILVER 00.00 1.20 0.00%

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Metal Market Report February 2018 - Week 1 Edition

February 2018 - Week 1 Edition

We’re Right on Schedule for “The Year of the Gold Coin”

Gold and stocks both fell last week but stocks fell further, shocking investors with a 666-point drop in the Dow Jones Industrials last Friday and then an even more shocking 1,175-point drop on Monday.  In the last six trading days, the Dow dropped 2,270 points (-8.5%). The stock market was overdue for a correction, so traders were looking for a reason to sell stocks, but the proximate reasons cited last Friday were low sales of Apple X phones and the publication of a controversial political memo about the FBI. Meanwhile, gold and silver rose on Monday, while stocks were suffering their sharpest decline in years.

At the start of the year, we made four predictions that would help make 2018 “The Year of Gold Coins.” Most of these four predictions are already coming true – some of them in very dramatic fashion.

#1: A Weak U.S. Dollar.  So far in 2018, the U.S. Dollar Index is down 2.68%. Many pundits had expected the U.S. Dollar to rise in 2018, since the Federal Reserve had indicated they would raise short-term interest rates three or four times this year.  The theory is that currency investors will run to the dollar as interest rates rise, since rates on the euro and yen (the two other largest-circulation currencies) are ultra-low, near zero. However, long-term rates are already rising rapidly in fear of inflation, which is sending investors away from the dollar. Higher rates are of no value to investors if inflation is also rising. Over the last year, the U.S. Dollar Index has fallen 10.25%, as the dollar is clearly in a new bear market.

#2: A Stock Market Correction.  We have seen this happen all of a sudden, in just the last six trading days. The Dow Jones Industrial Index reached a new all-time high of 26,616.71 on Friday, January 26. On Monday, February 5 (six trading days later), the Dow was down over 2,270 points (-8.5%).  The broader S&P 500 is down 7.8%.  After being up strongly in January, stocks are now in negative territory, year-to-date.  Whenever there is a panic of this magnitude, investors tend to seek safer havens. Bonds are not safer, since interest rates are rising – which causes the prices of bonds to go down, not up. When both stocks and bonds are falling, and the dollar is also falling, investors tend to turn to gold as a safe haven.

#3: Global Uncertainty and Conflict. This may be the next domino to fall.  The South Korean Winter Olympics start this Friday. In 2014, the Sochi Olympics in Russia pushed gold above $1,400 when Vladimir Putin annexed Crimea and invaded eastern Ukraine. What will “Rocket Man” Kim Jung-un do this month? Maybe nothing, but the world’s eyes will be glued on the Korean peninsula this month. If not there, we expect a violent revolution in Venezuela, which is being starved to death by its socialist dictators. In the Middle East, Iran is looking to take control of the region over Saudi Arabia, with Yemen as a proxy war between these two forces. China is looking to expand abroad – and who’s to stop them? There is also conflict at home over the Mueller investigation and new threats of a government shutdown.

#4: A Rising Gold Price. Amid a declining stock market, falling bond prices and a falling dollar, gold alone has delivered a plus sign this year, up about $45 (+3.4%), after scoring its best year in seven years during 2017.  If the stock market continues down, or a new international crisis erupts, we can probably expect the price of gold to rise toward $1,400 and attract more mainstream investors back into gold.  This typically drives more investors to diversify their portfolios with gold and rare coins.

When Gold Shortages Caused Global Panics – 1857 and 1894

Back in September 1857, major New York banks eagerly awaited the arrival of the S.S. Central America with a shipment of gold bullion and coins from the San Francisco Mint, the product of the massive gold mines of the California Gold Rush of the 1850s.  When news came through the telegraph wires that the ship had sunk off the coast of South Carolina, the country went into a panic. Banks closed, businesses went bankrupt and the “Panic of 1857” hit Wall Street – all because the “Ship of Gold” had disappeared.

Another Panic struck in 1894, when the U.S. Treasury suddenly ran out of gold.  Here’s a description of that event from the novel “The Driver” by Garet Garrett – written in 1922 about the Panic of 1894:

“Well, the United States Treasury did not hang out the bankrupt’s sign. What happened instead was that President Cleveland in his solitary strength met a mad crisis in a great way. He engaged a group of international bankers to import gold from Europe and paid for it in government bonds. The terms were hard, but the government, owing to the fascinated stupidity of Congress, was in a helpless plight.”

Those “hard terms” were 12% per year, an un-heard of high interest rate for that day.  The response to President Cleveland’s surrender to the rapacious bankers was immediate and vicious: “Many men of his own political faith turned against him, thinking he had destroyed their party. Congress was amazed. There was talk of impeachment proceedings. Popular indignation was extreme and unreasoning. The White House had sold out the country to Wall Street. Mankind was about to be crucified upon a cross of gold.”

This sets the stage for the dramatic campaign between the Republican William McKinley and his supporters – derisively called “gold bugs” – and the Silver Standard (or bi-metallic standard) advocated by William Jennings Bryan and the Democrats.

Gold Coin Market Adjustments

I have been told of two interesting gold coin market developments.  With low grade common $20 Liberties and Saints trading at or slightly below melt value, many dealers around the world are opting to melt them.  This includes twenties from Europe and South America.

Slowly but surely common date $2 ½ Indian gold coins in MS-63 have risen in price by 15% over the last three months.  These coins were not sent to Europe and South America like the larger denominations.


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