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Metal Market Report February 2018 - Week 3 Edition

February 2018 - Week 3 Edition

“The Ghost of Inflation Reappears” – Barron’s, February 19, 2018

Gold rose to $1,355 last Thursday, based on the high inflation readings but it settled down to $1,347 by Friday.  At the same time, 10-year U.S. Treasury bonds reached 2.9% yields – up from 2.4% at the start of 2018.  Stocks also recovered, but they are still trailing gold in 2018. When you combine rising inflation (at a 6% annual rate) with Treasury yields rising at a slower rate, you get a negative “real” rate of return, which is leading to a decline in the U.S. dollar and a corresponding increase in the price of gold.

Now you take that paper dollar
It's only that in name
The way that buck has shrunk
It's a lowdown dirty shame
That's why I got the blues
Got those inflation blues

--B.B. King, “Inflation Blues” (1983)

Last week, the two major inflation indexes came out at lofty levels.  On Wednesday, the Consumer Price Index (CPI) was announced as rising 0.54% (a 6.7% annual rate) in January. The “core” rate, which omits food and energy costs, rose 0.35% (a 4.3% annual rate), which is still fairly high.  The next day, the Labor Department said the Producer Price Index (PPI) rose 0.4% in January (a 4.8% annual rate), and the “core” rate rose by the same amount.  In the past 12 months, the PPI has risen 2.7% and the core PPI rose 2.5%.

Even though long-term interest rates are rising, and the Federal Reserve is expected to raise short-term interest rates again in March, the world is not beating a path to buy the high-yielding U.S. dollar because of this rising inflation.  If long-term rates on Treasury bonds reach 3% and inflation averages 4% for the year 2018, that is a negative “real” yield.  In Europe and Japan, investors in the euro and yen get near-zero interest rates, but they do not have to contend with rising inflation cutting into their “real” returns.

So far in 2018, the Wall Street Journal U.S. Dollar Index is down 3.4%, with the dollar falling -5.8% to the Mexican peso (a leading trading partner), -5.7% to the Japanese yen, -3.7% to the British pound and -3.3% to the euro.  The leading Wall Street pundits predicted a rising dollar in 2018, due to rising interest rates attracting more currency speculators, but we predicted a lower dollar, in part due to rising inflation.

One of the greatest rising costs this year will be the cost of servicing debt – both the national debt and personal debt.  Americans owe over $13 trillion in personal debt, in addition to their share of the $20.7 trillion in national debt.  Americans have accumulated growing debt over the last eight years due to super-low interest rates, but those rates will soon be rising more rapidly. The Fed has indicated they will raise rates three or four times this year, on top of three times last year. In addition, President Trump suggested last week a 25-cent-a-gallon tax on gasoline, which is already rising due to escalating costs of crude oil.

A President’s Day National Debt Summary

As we celebrate Washington’s Birthday, we recall a letter he wrote in April 1779 to John Jay, President of the Continental Congress, noting the fact that their paper currency, the Continental, was near-worthless:

“In the last place, though first in importance, I shall ask, is there anything doing, or that can be done to restore the credit of our currency? The depreciation of it is got to so alarming a point that a wagon load of money will scarcely purchase a wagon load of provisions.”

That’s one reason why the United States Constitution declares in Article I, Section 10, that “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.” Alexander Hamilton, Washington’s aide-de-camp during the Revolutionary War and his Secretary of Treasury in the first cabinet, was instrumental in creating the first gold and silver coins in the young Republic. The U.S. Mint was founded by the Coinage Act of April 2, 1792, authorizing three denominations of gold Eagles, five silver coins, ranging from a disme (dime) to a dollar, plus a copper cent and half-cent. 

Under the gold standard or variations thereof, the accumulated U.S. total national debt never exceeded $50 billion, but when we were cut loose from the discipline of gold, U.S. debts began to skyrocket to the point where we will probably finish this year with $21 trillion in debt and add $1 trillion or more per year in future years.  With a population of 325 million, today’s debt is about $65,000 owed by each citizen to future Americans yet unborn. As Congress votes more and more spending bills, the bill keeps growing.

Federal debt topped $20 trillion last year and it now stands at $20.7 trillion – well above the annual GDP of about $19 trillion.  It took 220 years and 42 Presidents to reach $5 trillion debt, but President George W. Bush (43) added $5 trillion and Barack Obama (44) doubled the debt by adding $10 trillion. What will the track record of President Trump be? He doesn’t seem to want to resist spending on infrastructure or defense. This new bill increases the defense budget by $160 billion and domestic programs $128 billion.

On February 7, Congress avoided another government shutdown, but at the expense of adding another $300 billion in spending over the next two years, thereby ballooning the federal deficit by that much more. Combined with tax cuts, this could push the annual deficits above $1 trillion again by next year.  This will virtually guarantee the long-term devaluation of the dollar and the rising value of gold.  Buy gold!

Expect Greatly Increased Interest in $2.50 and $5.00 Indian Gold Coins

The Royal Canadian Mint has just come out with a limited edition “double incuse” $5 Silver Maple Leaf coin, marking the 30th anniversary of the Silver Maple Leaf.  According to the RCM, the incuse (or sunken) format was first made famous by the legendary $2.50 and $5.00 Indian gold coins struck by the United States Mint over a century ago.  These Indian gold coins were born in controversy.  Since their design was recessed into the coin – as opposed to the standard raised relief – people were scared to save them in fear of germs spreading from the coin’s recessed reservoir.  These coins were smaller than the $10 Eagles and $20 Double Eagles, so they were less often shipped overseas to banks and used more often in circulation and less often saved in collections, so the fear of germs and the practicality of their lower denomination has created a series with relatively few examples surviving in higher grade. In addition, these coins offer a series of famous firsts.

  • The first $2.50 design to bear the motto “In God We Trust”
  • The first U.S. coin design that used a Native American model
  • The first coin struck with a fascinating new “incuse” design
  • The first coin designed by Bela Lyon Pratt, pupil of Augustus Saint-Gaudens

Their rarity, along with this historic list of unprecedented “firsts,” is driving investors and collectors to add Indian gold to their portfolios and collections.  And now, with the promotions of the new Canadian incuse design, there will be more ads and references to the $2.50 and $5.00 Indians in the Canadian and American press, pushing up demand for these classic century-old U.S. gold coins, minted between 1908 and 1929, now available in choice uncirculated condition, as graded by PCGS or NGC, while inventories last.