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.

6/6/2017: Bullish momentum building

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In this issue:

Drag on dollar
Charts and changing trends
Fantastic values in classic gold coins

As 2017 nears its midpoint, gold is strong and bullish momentum is building. After rising for 10 of the past 11 weeks, the metal is now 11% higher for the year. The dollar, meanwhile, has weakened sharply as stronger economies abroad and political uncertainty at home cause capital to shift away from U.S. assets. This downtrend in the dollar has been the main driver of higher gold prices in the first half of the year, and should continue to propel them in the second half.

After lagging in economic growth for years, Europe and Japan are quietly turning in stronger performances, and this change is weighing on the dollar. While U.S. GDP for the first quarter of 2017 was an anemic 1.2%, Eurozone GDP was a healthier 1.7% and Japan's even better at 2.2%. Allocations by global money managers to U.S. stocks slumped to a nine-year low in April, and U.S. equity funds saw an outflow of $22.2 billion during the seven weeks that ended May 3, the largest seven-week redemption in more than a year. Much of this money is going to Europe, with net inflows into European funds hitting a five-year high for the first quarter.

Drag on dollar

Turmoil surrounding the Trump administration is also taking its toll on the dollar. With President Trump's election, stocks rose to record levels and the dollar rallied to a 14-year high. This so-called Trump Bump was fueled by speculation that Republican control of government would mean the quick enactment of Trump's pro-growth, low-tax agenda. But factionalism in Congress and turmoil about Russian involvement, real or not, in the Trump campaign has brought legislation to a crawl. Tax code restructuring, healthcare reform, and plans for rebuilding infrastructure now seem to be fading from view, and the Trump Bump with them.

Because of gridlock at home and rising growth abroad, money is flowing out of the United States at the highest rate in years, much of it returning to Europe and Japan. The dollar is being sold while the euro, yen, pound, and Swiss franc are being bought, causing the buck to fall 6% this year and surrender all its post-election gains. While this outflow might be temporarily staunched by another rate hike from the Fed later this month, we believe the dollar's downtrend will continue throughout the year as the Fed slows the pace of further hikes and other economies continue to strengthen.

Let’s look at the latest charts.

Charts and changing trends

U.S. Dollar

As you can see at the far right of this 3-year chart, the dollar has decisively broken down. After peaking at 103.29 in December, when the Fed raised interest rates for the second time in nine years, the buck has declined steadily in choppy trade, setting a series of lower highs and lower lows through April. Despite stair-stepping lower during this stretch, it managed to hold support perfectly with its four previous lows. That support fell away in mid-May.

We now see a major technical indicator signaling a reversal in trend. The dollar's 50-day moving average has crossed over its 200-day moving average. This cross has occurred four times in the past three years (denoted by the blue circles on the chart). With one exception, each cross signaled a change in direction for the dollar lasting for extended periods of time, months or even years. The chart shows four true crosses since 2014, two up and now two down, with the second downward cross just occurring. Only one (denoted by the ellipse) turned out to be a false reversal, lasting for only five weeks.

The recent, sharp decline in the dollar puts it back into the middle of its 2015 and 2016 trading range, between 93 and 100 on index chart. Back then, the U.S. economy was hardly robust, growing at just 2.6% in 2015 and 1.6% in 2016, but it was still stronger than Europe and Japan. Lately, as noted above, this is no longer the case. The U.S. economy is now facing its strongest international competition in years, and further dollar declines are possible. Remember, the current U.S. economic recovery is now the longest and weakest in modern history, and it has been fueled by massive and unprecedented government debt. By any historical measure the U.S. economy is due for a correction.

Furthermore, the Fed has been a big damper on the gold market over the past 18 months, but that influence may be decreasing. The drumbeat of rate hikes helped support the dollar, pressuring gold in turn. But each time the Fed has come through with hikes, the gold market has successively diminished its price oscillation, losing less in anticipation and recovering more quickly afterward. The market almost universally expects another quarter-point hike in June. However, gold has risen substantially in the weeks leading up to this expected hike, something we have not seen before.

The Fed's appetite for additional rate hikes after June appears to be waning. St. Louis Fed President James Bullard questioned the need for higher interest rates in a speech at Washington University in May, calling the central bank's suggested policy of two more hikes this year "overly aggressive relative to actual incoming data." Fed Governor Lael Brainard said last week that while the "further removal of accommodation" is likely to come soon, weak inflation over the past few months may cause the central bank to reassess the pace of future rate hikes. And in the minutes from their May meeting, the central bankers also stated their plan to begin reducing the Fed's $4.5 trillion balance sheet by rolling off assets as they come to maturity. By removing stimulus this way, the Fed will be able to maintain a stable interest rate structure for longer, reducing the need for hikes in the future. All that is good for gold.

Gold

As you can see, the 3-year gold chart is bifurcated almost exactly in the middle by a vertical blue line on January 1, 2016. This is the turning point, when gold’s downward 5-year correction from the $1,900 peak bottomed and its renewed bull market began. Price action to the left of the vertical blue line shows a choppy but orderly decline to the major long-term bottom at $1,050. Price action to the right shows a rising market with some of the most active highs and lows we have seen since we started tracking the gold market in 1980.

Remember, every market tends to overshoot natural equilibrium points at extremes, and the last six months of 2015 were an extreme time for precious metals. The U.S. economy was still gathering strength, especially relative to Europe and Japan. Meanwhile, the Fed was relentlessly preparing the markets for the first interest rate hike in nine years. As a result, major funds and speculators started bailing on gold, creating a cascade of selling that pushed it down to $1,050, which was $100 below its natural support at $1,150, indicated by the lowest red and green support and resistance line. This line is almost all green, indicating support. More importantly, the December 2015 low of $1,050 is clearly a major long-term bottom for gold.

As 2016 began, gold rebounded very quickly from this oversold point. Economic growth was under 1% for the fourth quarter of 2015 and first quarter of 2016; and the introduction of negative interest rates in Japan and parts of Europe in January and February of 2016 spooked financial markets. Gold caught a strong bid on flights to safety. By March 2016, the metal moved back over the $1,215 red and green support and resistance level. If you look to the left of the vertical blue line on the $1,215 support and resistance line, most of it is red, indicating upside resistance. To the right of that blue line is mostly green, indicating support. This means gold has now enjoyed support above $1,215 for most of 2016 and 2017.

The remainder of 2016 continued to be hyperactive, as gold was influenced by two of the biggest geopolitical events since the Greek debt crisis, Brexit and the ascendancy of Donald Trump. Like many other markets, gold knee-jerked higher and lower to these events. Brexit saw massive inflows into gold on safe-haven demand. Trump's election, on the other hand, resulted in outflows as the dollar and stock markets soared on expectation of tax cuts, deregulation, and infrastructure spending.

In 2017, however, gold is settling down into a more natural trading pattern for the first time in quite a while. More importantly, it is setting a series of higher lows and higher highs as we move into the second half of the year, signaling a solid uptrend. Despite the headwind of a rate hike in March, gold set a series of higher short-term lows at $1,190, $1,201 and $1,216. It is now clearly in an upward pattern, indicated by the parallel blue trend lines. Gold has also tested major resistance at $1,295, and is fast approaching it again now. Unlike the two lower support and resistance lines (mostly green, indicating support), the $1,295 line is mostly red, indicating resistance. Any movement above this $1,295 resistance level would be very bullish, indeed.

As we discussed in the U.S. dollar section above, there are four points on the gold chart where the 50-day moving average crosses over the 200-day moving average, indicating trend reversals. These points are circled in blue. The latest cross has just occurred and it is pointing up for gold. This is a bullish sign, especially when you consider not only how much the U.S. dollar has weakened recently but why it has weakened. Gold is looking strong and for the most fundamental reason there is, U.S. dollar weakness, and that dollar weakness could continue for the coming months.

In the short-term we see support for gold at $1,250 and major support at $1,215. Gold is currently bumping up against a major resistance point at $1,295 and is looking bullish. A move over this resistance point puts gold into the upper third its major trading range, between $1,295 and $1,370.

Silver

Silver has traded in sympathy with gold over the last three years, so their charts show similar a pattern. The difference today is that silver is modestly lagging gold in price appreciation, and its 50-day moving average has yet to cross above its 200-day moving average. The previous three crosses are indicated by the blue circles. As the primary currency of last resort, gold is clearly leading now. But as many of you know, when silver makes significant price moves, they tend be strong ones, so be ready.

Silver is currently trading near the middle of a range between $16.95 to $18.45, indicated by the middle two red and green support and resistance lines. Like gold, silver jumped higher last summer in response to Brexit and the uncertainty surrounding the U.S. presidential election, punching strongly over resistance at $18.50. Following the election, as risk appetite returned to the markets, it has remained under $18.45. When silver moves back over $18.45, it will catch a lot of momentum.

We now see major support for silver at $15.50, with support again at $16.95. We would still strongly recommend buying silver up to the $18.25 mark. The conundrum is when silver moves, it makes 50 cent or larger moves in single trading sessions these days. If you want to accumulate silver, it’s still a good buy under $18.25. In the current environment, our bias is to the upside. Any move under $17, should it occur, would be an excellent buying opportunity.

Fantastic values in classic gold coins

Pre-1933 U.S. gold coins

The market for pre-1933 U.S. gold coins is one of the best we've seen in years. Prices for many coins are extremely low relative to their overall scarcity and intrinsic gold content. For bulk gold investors, $20 Saint-Gaudens, Almost Uncirculated and $20 Liberty, Almost Uncirculated are trading at lower prices than modern 1-ounce gold bullion coins. In the recent past, these 100-year old coins have traded for $150 or more over modern bullion.

For greater potential leverage to a rising gold market, we strongly recommend $20 Saint-Gaudens, Mint State 64 and $20 Liberty, Mint State 63 right now. These coins are much scarcer than their AU siblings but cost little more in the current market. Plus, they are trading at the lowest premiums in nearly a decade, which means they are ripe for big gains when the gold market heats up. They offer a great track record and strong upside potential, all with the lowest premium risk we’ve ever seen.

Pre-1935 European gold coins

Premiums for classic European gold coins are also lower than normal. We currently have ample supplies of two of our favorites, British gold sovereign "Kings" and Swiss 20 franc "Helvetias". Minted pre-1935, they are two of the most popular and recognized gold coins in the world. Their premiums are around the same as modern fractional gold bullion coins, making them an excellent value right now.

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

Sincerely,

Dana Samuelson, President
Bill Musgrave, Vice President