AGE's Gold Commentary

AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.

7/11/2016: Gold, silver break out!

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In this issue:

Brexit solidifies the uptrend
Latest gold, silver charts
Superb values in classic coins

Gold and silver are in breakout mode, confirming solid uptrends that began six months ago. Following Britain's shocking vote to exit the European Union on June 23, both metals have surged to their highest prices since mid-2014. Gold has now gained 28% in 2016, rising 8% in the past two weeks alone. Silver has been even more impressive, jumping 16% since Brexit for an astonishing 38% rise so far this year. In our 35 years in the precious metals arena we have seldom seen these kinds of short-term gains, and many analysts are calling for much more. Why the big moves?

Over the past year, the dominant influence on gold has been the Federal Reserve—if and when it will raise interest rates. In December 2015, the Fed delivered the first rate hike since 2006 and signaled three more to come in 2016. Gold ended the year on a downturn because higher interest rates support the dollar, and a stronger dollar pressures gold and other commodities by making them more expensive overseas.

Throughout the first quarter of 2016, however, persistent weakness in the U.S. economy prevented the Fed from further hikes. Gold gained 18%. Throughout the second quarter, soft U.S. employment numbers and weaker global growth again stopped the Fed from hiking. Gold's uptrend continued on the shifting rate outlook. Even after last week's very strong July's nonfarm payrolls report, Fed fund futures still foresee no rate hike until February 2017, according CME FedWatch.

Brexit solidifies the uptrend

All of this has been bullish enough, and then Brexit stunned the world, causing havoc in the markets not seen since the Lehman Brothers collapse in 2008. Within hours of the vote, gold gained $100 in Asia. Within days, $3 trillion was wiped from global equity markets as investors shed risk. Holdings in negative-yielding government bonds—mostly from Germany, France, and Japan—exploded to more than $10 trillion, up from around $1.2 trillion on June 1. Yields on U.S. Treasury bonds have fallen to two-year lows while gold and silver have rocketed to two-year highs.

Bank of America Merrill Lynch reported last week that investment demand for gold is at an all-time high, according to weekly fund inflows. In the week ending July 6, more than $4.1 billion flooded into precious metals funds, the most on record, as global investors seek refuge from Brexit fallout and near-zero or negative interest rates.

Safe-haven assets are very much back in demand, and for good reason. No one really knows how Britain's exit will affect the EU or the global economy, but predictions are uniformly negative. Central banks are pledging to do what they do—cheapen their currencies further—with Britain, Europe, Japan, and China all signaling deeper easing to come. Fed Vice Chair Stanley Fischer says the Fed will not raise rates until the impact of Brexit can be fully determined, which may take a very long time.

With global risk escalating and central banks running out of ammunition, it’s no wonder demand for gold and silver as the currencies of last resort has risen so dramatically. Credit Suisse is forecasting gold prices to reach $1,500 within the next six to nine months as this uptrend develops. Silver's prospects seem even brighter, with many analysts calling for $30 to $45 or higher. Let's take a look at the latest charts.

Latest gold, silver charts

Gold

Gold has broken out with gusto following the Britain's unprecedented decision to leave the EU. This surge is confirmation of a bullish change in trend that began in January. When gold broke major resistance at $1,225 in February, after the Bank of Japan joined the ECB by instituting negative interest rates, in passed the first hurdle. The fact that gold held those big January and February gains and remained above $1,200 was the first indication that a trend-reversal was starting.

As defined by the blue parallel lines in the chart below, the burgeoning uptrend progressed throughout March and April, hampered by vacillation about whether or not the Fed would raise interest rates. When the minutes from the April FMOC meeting signaled the Fed's intention to raise in June, prices pulled back from $1,280 on May 18 to bottom at $1,212 on June 3.

Then May's nonfarm payrolls data was released. Merely 38,000 new jobs were created, the fewest in six years, and totals for March and April were revised lower by a combined 59,000. The shockingly weak labor data raised doubts about the economy and drastically reduced the likelihood that the Fed would hike rates during the coming months. Gold jumped 2.5% that day and began a run of six straight weekly gains.

When Brexit occurred on June 23, it solidified gold's change of trend. Within an hour of the decision, the metal skyrocketed to $1,362 before settling back down to $1,320. After the initial shock came the grim reality of a weakened UK, fractured EU, and global economy in need of yet more monetary easing. Gold continued its march higher as investors worldwide sought protection from rising currency risk and market volatility.

Now settling into a $1,335 to $1,375 trading range, gold is marking higher highs and lows with bias towards the upside. When the June nonfarm payrolls report was released on July 8, showing a whopping 287,000 jobs added, gold initially sold off $20 but rebounded back fully within an hour. This is a very bullish signal that buyers are aggressively lining up to buy the dips, further confirming the uptrend. Likewise, silver initially dropped 50 cents on the jobs data and then bounced back to $19.90 in less than an hour.

Looking forward, we see upside resistance for gold at $1,382.50 and then major resistance at $1,417.50. We see short-term support at $1,335 and $1,300. Curiously, when it rallied from $1,400 to its all-time high of $1,920, gold spent very little time trading in the $1,425 to $1,550 range. If gold can sustain its current momentum and break above $1,417.50, a similar acceleration towards or above $1,500 could follow.

Silver

As you can see in the three-year silver chart below, silver has surged above the U-shaped trough it's been stuck in for the last 21 months, moving convincingly above short-term upside resistance at $18.34 to as high as $21.22 during intraday trading. As you know, silver is usually more volatile than gold and can really take off when these markets get moving. This has proven to be the case yet again.

In the short term, we see silver settling into a $19.40 to $21.25 trading range. If it moves above resistance at $21.25, we see further resistance at $22.75 and $24.50. Should silver weaken in price, which looks doubtful in this environment, we see short-term support at $19.25 and again at $18.35.

In the longer term, if silver can move over $24.50, it has a lot of room to run, with no major technical resistance until $30.00. Our optimistic view is that it may eventually settle into a $25.00 to $30.00 trading range as this market evolves.

Superb values in classic coins!

As we've said before, when the gold price makes a quick run higher, classic U.S. gold coins often lag before rising themselves. As a result, premiums become temporarily compressed because the intrinsic gold value of the coin has risen at a faster rate than its price. This is exactly what is happening now, creating some fantastic—but short-lived—opportunities in the classic coin market, especially for the two coins we describe below.

Both coins are remarkably scarce. When demand picks up, it can overwhelm the thin supplies in the market, driving prices and premiums higher very quickly. Their premiums today have compressed by 4% to 8% in recent weeks, making them a great deal in the current market.

$20 Liberty MS63 dated 1900-P

We’ve located a small cache of $20 Liberty gold coins in Mint State 63, dated 1900-P. This date is about four times as scarce as the common 1904-P in Mint State 63 condition. Yet we're able to offer these MS63 coins at the same low prices as the more common date. And it gets even better. This cache is from a European collection that's been hidden away since World War II. Their quality is unsurpassed.

$20 Liberty gold coins in choice Mint State 63 grade are rising today from their lowest prices in more than seven years as the gold market has turned from bear to bull with a vengeance in the last several months. And while these coins have ridden the gold price higher since January, their premiums today are at all-time lows because the gold price is leading the market and coin prices are lagging at the moment and have yet to catch up.

Today's premium for these coins—that is, their price above intrinsic gold content—is merely 30%. Over the past decade, premiums have averaged over 68% above gold content, almost twice today's low premium. Since 2012, on the three previous occasions when premiums have fallen near these cyclical lows, they’ve rebounded sharply.

So we have a rising gold bullion price, a rising but still low $20 Liberty in MS63 price with an abnormally low premium. That’s why we highly recommend these U.S. gold coins now. Even if the gold bullion price stalls, these coins have premium potential that is unrealized. That and because of they have a great previous track record of appreciation in a hot market like in 2009 when they traded for as high as $3,000. These are the best value for the price in U.S. $20 gold coins in the market today.

$10 Indian MS64

For buyers who want even more overall scarcity and potential leverage to the rising gold market, we highly recommend the $10 Indian in MS64. We’ve always loved both the classic U.S $10 gold Liberty head and the $10 Indian head. As workhorse coins of commerce, most were used as currency so the number of overall survivors in MS64 condition is small today. For the $10 Indian, only about 40,000 are known for all dates and mint marks in MS64 condition. Normally, $10 Indians and $10 Liberties in MS64 trade at similar prices. Today, the $10 Indian is trading at about a 9% discount to the $10 Liberty, making it a superb value.

And they have a great previous track record as well. They traded above $2,955 in 2006, 2008, and 2009. Today, they're less than half that price! Their average premium over gold melt since 2006 is 287%; today it's 116%! They combine great scarcity, large gold content, and low prices to create a superb value in classic gold coins. These are another great value for the price in classic U.S. gold coins today.

Great buys in bulk silver

For silver bullion buyers, premiums on pre-1964 U.S. junk 90% silver dimes, quarters and half dollars are as low relative to their melt value as we have seen in years. With these coins, not only do you get bulk silver at an unusually good silver price, you get additional profit potential from premiums as well. In the past two years, premiums for these U.S. silver coins have been as high as $4 per ounce. Today, the premium is around $1.75 over melt. Silver bars and bullion coins like U.S. Silver Eagles and Canada Maple Leafs offer no such premium potential.

U.S. Peace silver dollars in Brilliant Uncirculated condition are undervalued relative to the rising silver price at the moment. In fact, silver has increased almost $5 per ounce in the last four months, yet BU Peace dollars have barely budged. This won't last. Selling today for under $29 per coin in quantity, these nearly 100-year-old mint condition coins are a terrific deal in the current market.

That’s all for now. Thank you for your time and business!

Sincerely,

Dana Samuelson, President
Bill Musgrave, Vice President