Friday, September 30th, 2016 MST

Gold: More than Metal

Monetary Digest, July 2000

From time immemorial, man has treasured gold because of its unique properties. It is ductile, and one ounce can be drawn into a wire stretching miles. It is so malleable that it can be hammered it into leaves so thin that it takes hundreds of thousands to stack one inch high. It is resistant to chemicals, and gold ornaments last not a lifetime, but forever. Gold is virtually indestructible, and the first ounce mined is still in existence. Gold can be formed into beads barely visible. Because gold is soft, it is often alloyed with other metals (usually copper) to make it resistant to wear. Yet, alloyed gold can be refined into pure gold and formed into bars convenient for storage.

Because of these properties-and not any government edict-gold became money. For millenniums, people have readily accepted gold in exchange for goods and services primarily for one reason: they knew that they could always exchange it for other goods and services. In short, gold is money.

Academia maintains that for a substance to serve as money, it must:

  • Be universally accepted,
  • Serve as a store of value, and
  • Be a standard of measure.

Gold readily fulfills the first two, but today merchants do not price their goods in ounces or grams of gold (Although they could.) Dollars, both as paper and computer entries, are the world’s preferred money. Even gold is priced in dollars. Dollars, however, have some major flaws.

Having no intrinsic value, dollars are printed at little cost. Digital dollars can be added to the money supply at virtually no cost. Consequently, there is always the risk that the people in charge of the printing presses and the computer keyboards will create too many dollars and cause an inflationary spiral. Should too many dollars be created, hyperinflation sets in and the dollar becomes worthless. History is replete with paper currencies that have been destroyed by the printing press.

Many economists ridicule the idea that hyperinflation could happen in the United States. However, nearly all crises are met with increases in the money supply. Faced with the Mexican Peso crisis, the Long-Term Credit Management crisis, and the Asian crisis, the Fed pumped up the money supply. Last year, fearing a Y2K crisis, the Fed again boosted the money supply. (Now, the Fed’s destroying much of that money, which is helping sink the stock market, but that’s another article.)

Gold, on the other hand, is the better money. It meets the first two requirements and could easily meet the third. Items such as houses, cars, and, land could be priced in ounces of gold. A six-pack of Coke could sell for a third of a gram of gold. Better yet, smaller items could be priced in silver as well as gold.

However, governments, which always want to control the nation’s money, have problems using gold as money. First, gold is difficult to come by. Mining it is risky, expensive, and requires great engineering and geological skills. Mining gold is not something that governments should get involved in. Consequently, during periods when gold has been the standard money, governments came by it by taxing the people and requiring them to pay in gold. But, as taxes grow, the people grumble-sometimes even revolt. Therefore, governments like to use for money cheap commodities, such as paper, copper, nickel, tin, and now computer entries.

Meanwhile, people hoard gold because they know it is a better store of value than base metals and paper. So, governments take two more steps. They make gold illegal and declare government-issued money “to be legal tender for all debts, public and private.” That’s what Roosevelt did in 1933. The nation’s money becomes fiat, money by decree. It is convertible into nothing. Nothing backs it up. The government is then in control of the nation’s money supply, and the inflationary floodgates are open. Higher prices follow like night follows day. According to official government statistics, since 1933 the dollar has lost 99% of its purchasing power. During the 1990s, a relatively benign decade for inflation, the dollar lost 30% of its purchasing power.

Still, many investors see gold simply as a commodity whose price is determined by supply/demand fundamentals. That comes with living in the United States, where it has been almost 140 years since war has ravaged the land. During war, people quickly learn the pitfalls of paper money. No self-respecting French peasant would be caught dead without a few gold francs.

Viewing gold as a commodity also comes with living during the most prosperous times this country has ever seen. Forgotten are the anxieties that come with a weak economy where unemployment is high and negative news fills the airwaves. Gone are the fears of having to look for a job.

Americans are “graying” at the fastest pace in the world. Yet, few baby-boomers worry about retirement. In fact, putting money in traditional savings is no longer popular. The stock market has replaced saving and will provide for retirement. Well, if it hasn’t yet, it soon will, boomers reason.

Fearing inflation (and, perhaps, a runaway stock market), the Fed has given us six straight interest rate boosts, and the discount rate now stands at 6%. Historically, increases to these levels have led to problems for both the economy and the stock market. It used to be that only three rate hikes by the Fed spelled trouble for stocks. “Three steps and stumble,” was coined to warn investors. More ominously, statistics suggest the Fed also has started choking the money supply. Any wonder housing starts are falling, that automakers are now offering incentives although car sales are at record levels, and that retail sales are softening? Perhaps, things are changing.

Although not conceded by most analysts, Dow Theory advocate Richard Russell maintains stocks have entered a primary bear market. If so, then we are about to see the reverse of the “Wealth Effect.” During rising stock markets, and especially during abnormally long ones, investors’ net worth swell. Consumer confidence rises, and sales of expensive homes, cars, boats, clothing, etc. increase. The economy booms as consumers spend. For years, economists have admitted that we have a consumer-led economy and have feared the day when consumers pull back. We may be there now.

Housing starts, retail sales, and consumer confidence have turned down, due both to six straight interest rate hikes by the Fed and a stock market that has ceased throwing off 20% per year profits. This year stands the chance of being the first in fifteen that the Dow Industrials will finish the year below their close for the previous year. With fourteen years of strong stock markets, how could consumers not have become over confident? Now, though, the negative side of the “Wealth Effect” is about to take over, and the age-old principle of diversification will again be given its due respect.

Then, investors will admit that “A little gold is not such a bad idea. After all, it’s within a few dollars of a 20-year low.” Then, stock investors will discover that gold is the ultimate hedge against financial chaos and no longer ridicule the idea of “having a few ounces on hand just in case the worse happens.” Next, they will realize that the Fed’s standard policy for fighting recession is to turn on the printing presses, which is inflationary. Gold will rise in price and begin to look really good. Investors will hate themselves for not buying when it was below $300.

Forecasting the severity and duration of a either a bear market or a recession is impossible. However, bear markets often reverse half the previous bull market’s climb. After “irrationally exuberant” bull markets, the bear can take stocks down even further. It wouldn’t be unrealistic, if accompanied by a severe recession, for this bear market not to end until blue chip stocks yield 6%. That would put the Dow Industrials at about 2500, based on today’s dividend pay-outs. This bear market could maul investors. Such conditions would reward gold investors. It’s been a long wait, but the time looks right for gold to prove it is more than just a metal. Gold is money, the preferred money during difficult times.

What a Difference a Dealer Makes

In direct opposition to telemarketers, for the last five to six years, CMI has warned of the dangers of buying old US gold coins when they carry big premiums. Collapsing prices for old US gold coins over the last 18 months have proven us right. Investors who didn’t have the ammunition to fight off telemarketer attacks have suffered big losses. CMI is determined that its clients not be among those victims.

The most commonly promoted old US gold coins are $20 Libertys and St. Gaudens, also dubbed Double Eagles. The May Monetary Digest discussed a telemarketer that is recommending Double Eagles simply because their premiums have shrunk 50% over the last 18 months. CMI believes the premiums on old US gold coins will fall further.

Now, one the nation’s largest coin dealers, which is basically another telemarketer, is promoting St. Gaudens as its “strongest buy recommendation EVER!” Do not swallow that line. Old US gold coins are good buys only when they sell at or near spot. Just because old US gold coin premiums have shrunk doesn’t mean they are good buys. Prices are falling because premiums are shrinking. CMi believes old US gold coin premiums will shrink further. And, this is especially true if the price of gold rises. Let’s dissect a couple of the promoter’s arguments.

The promoter says of the uncirculated St. Gaudens, ” . . . a coin that is many times more rare than modern gold bullion coins . . . ” First, there is no way of knowing how many uncirculated St. Gaudens escaped Roosevelt’s melting pot in 1933, but estimates of Double Eagles stored in European bank vaults are in the tens of millions, which is more than the approximately 14 million 1-oz Gold Eagles minted since 1986.

Just as important, comparing St. Gaudens with bullion coins is not valid. Bullion coins sell at only a few dollars over the value of their gold content, and investors buy them as a convenient way to own gold bullion. On the other hand, some uncirculated Double Eagles sell at prices hundreds of dollars above spot (Their prices depend on their grades and how much the dealer marks them up.) Additionally, rarely do investors go out and buy Double Eagles; most are “sold” by telemarketers. You can make money buying gold, but it is difficult to make money buying coins carrying premiums of 60% to even 200%.

The telemarketer also says: “Despite the fact that the Double Eagle is currently undervalued, recent history has shown that it can provide gold investors with a hedge against falling gold prices. In 1984, the MS63 St. Gaudens soared to over $1,000 per coin while the price of gold was falling to $388 per ounce.”

First, in 1984, very few Double Eagles were graded MS63, making it a thin market that could rise with a single telemarketer’s promotion. Since then, tens of thousands of Double Eagles have been repatriated from Europe and graded MS62, MS63, and higher. It is unlikely that common date MS63 St. Gaudens will ever again top $1,000, at least not until gold tops $1,000.

Consider also the ridiculousness of “Recent history has shown that it (gold) can provide gold investors with a hedge against falling gold prices.” Do you really want to pay a 60% premium, which may disappear, for protection against “falling gold prices” when gold is within a few dollars of a 20-year low?

Finally, this major telemarketer recommends trading bullion coins for Double Eagles. Wrong. If you’re going to do any trading, it’s the other way around. Trade Double Eagles, while they still have premiums, for bullion coins, preferably the Australian Gold Dragons, which are bullion coins with numismatic potential. Swapping bullion coins into Double Eagles would not only result in your having fewer ounces of gold, but in a rising gold market those coins could fall in price, especially if European banks sell.

Sometime in the future, VF/XF Double Eagles will sell at or near spot, and MS62/MS63 will sell with $30 to $40 of spot. Then they will be better buys than common bullion coins. And, at that time, trading bullion coins for old US gold coins will be the right move, but not until then. Right now, new money going into gold should be for bullion coins. The Gold Dragon is the best bet. It sells at a small premium over the value of its gold content and has numismatic potential.

Gold Dragons: Bullion Coins with Numismatic Potential

CMI believes the Australian Gold Dragons to be the best gold investment on the market right now. Gold Dragons sell at only a few dollars more than the popular Gold Eagles and hold numismatic potential not available in Gold Eagles and other bullion coins. Listed below are a few of the features that set Gold Dragons apart:

  • Production is limited;
  • They are the most exquisite bullion coins being struck;
  • They are minted by Australia’s Perth Mint, which is gaining recognition as the world’s premier producer of collector coins;
  • Gold Dragons are part of the Perth Mint’s Lunar Series, whose earlier coins have already attained premiums.

The Gold Dragons are part of Australia’s Perth Mint Lunar Series, which is based on the Chinese 12-year lunar calendar. This calendar dates from 2600 BC, and each year is named after an animal. Additionally, each animal sign, in turn, is governed by the five elements of wood, fire, earth, metal, and water, with each element appearing with each animal only once every 60 years. All of this gets to be very important for the Year 2000 Gold Dragons.

The year 2000 marks the return of the metal dragon after 60 years. For the children born in the year of the metal dragon, life is beautiful and, supposedly, everything they touch “turns to gold.” Also, this is the first time in 3000 years that the Year of the Dragon has coincided with the end of a millennium. The year 1600 was the last time the Year of the Dragon coincided with the end of a century.

Gold Dragons are exquisitely struck, with near proof quality, and are now probably the most beautiful bullion coins being minted. The coins are encapsulated in perfect-fitting, clear, airtight plastic containers similar to those that protect proof coins.

With mintage of the 1-oz Gold Dragon limited to 30,000, at $300 gold a mere $9 million would buy them all. By comparison, Gold Eagles have unlimited production. In 1999, the U.S. Mint turned out 1,491,000 one-ounce Gold Eagles and in 1995 (a bad year) 226,000. Additionally, Gold Dragons are .9999 fine gold, and Asians prefer pure gold. CMI has been in touch with the Perth Mint and has been told that Gold Dragons are being very well received throughout Asia. The earlier coins set the stage, alerting collectors to the Lunar Series. But, the Year 2000 Dragon is going to be the big winner.

The premiums on the fractional-ounce Gold Dragons are only slightly higher than the premiums on comparably sized Gold Eagles, making them attractive to investors who like smaller coins. The 1/20-oz Gold Dragon is basically a jewelry item, carrying a premium of approximately 40% above spot.

The Perth Mint introduced the Lunar Series in 1996. The table below shows prices at which the earlier coins are now selling.

When a series of coins is well received by collectors, the earlier coins command the higher prices. However, because of the uniqueness of the Year 2000 Gold Dragons, CMI believes they will achieve premiums when the Perth Mint stops minting them and starts turning out the 2001 Year of the Snake coins. Within 1-1/2 to two years, Gold Dragons could easily carry $150 premiums.

Although Gold Dragons sell at bullion coin prices, they have excellent numismatic potential. For as long as Gold Dragons can be bought at bullion coin prices, investors should make them their first choice.

Other Lunar Calendar Gold Coins

The Chinese lunar calendar has been used for more than 5,600 years; therefore, it should come as no surprise that other coins based on the world’s oldest measurement of the seasons have been minted. Surprisingly, though, there have not been many. In 1976, the Hong Kong mint introduced the first, and in 1984, the Singapore mint began a series. Both covered all twelve animals of the Chinese calendar and ended.

Appropriately, China mints Gold Dragons. However, so much confusion reigns around the Chinese coins that collectors find it impossible to know when they have completed sets. Presently six Chinese dragons are offered, ranging in sizes from eight grams to 12-ounces. However, China introduced the eight-gram coins in 1981 but didn’t add other sizes until 1988. Then, in 1993, it added a half-ounce coin. All of which suggests other coins may still be added. One Asian coin expert views the China mint as a “factory” where coin orders are placed. Little planning has gone into China’s lunar coins.

The Hong Kong Series

Although the Year of the Rat begins the Chinese lunar calendar, the Hong Kong series began in 1976 with the Year of the Dragon; it ended with the Year of the Rabbit in 1987. When the Hong Kong series was introduced, Hong Kong was still a part of the British Empire, and the coins were minted by the British Royal Mint. Only one size was minted, a 0.4708-ounce coin with a face value of $1,000 (Hong Kong). Officially, coins celebrating “Royal Visits” to Hong Kong by Britain’s Queen Elizabeth started and capped the series. Both uncirculated and proof coins were minted.

The uncirculated coins range in price from $220 to $600. The 1976 Dragon sells for $500. Only the 1983 Year of the Pig carries a higher price ($600). Proof coin prices range from $300 to $950.

The Singapore Series

The Singapore Mint is a modern, high-tech mint which turns out both collector coins and coins for circulation. It also mints coins for other small Asian countries. Its work is high quality, and collectors generally applaud the beauty of the Singapore Lunar Series.

This series began in 1984 with the Year of the Rat and offered five sizes of gold coins, except 1984 and 1985 when 1-oz coins were not minted. No proof coins were made. Most of the 1-oz Singapore lunar coins can be purchased at about $360.

CMI does not recommend either the Hong Kong or the Singapore lunar coins as investments. These coins are collectibles, and buyers should recognize them as such. Although some collectibles rise in price, many do not. Premiums on the Singapore coins, however, are not high.

On the other hand, Gold Dragons of the Perth Mint Lunar Series offer investors a unique opportunity. The coins are still being minted and carry premiums only slightly higher than Year 2000 bullion coins. When production ceases, Gold Dragons could achieve premiums immediately, especially the 1-oz size, which collectors tend to buy first. Many collectors, though, go for a complete set. However, the fractional-ounce coins have higher quantity authorizations. Yet, smaller coins have wider use in the jewelry industry, which will deplete their supplies in the future.

For several reasons, Australia’s Gold Dragons seem certain to become the most popular of the lunar series collections. First, all the coins are of the highest quality and have great eye-appeal. This not only pleases existing collectors but also draws new collectors. Second, the Perth Mint has a reputation for turning out exceptional coins and already has an extensive following; this provides built-in demand.

Finally, in order for a collector’s series to be successful, it has to be promoted. Gold Corp Australia, the Perth Mint’s marketing arm, is dedicated to that purpose. It operates offices in the US and in other countries. And, the Internet is the best promotional tool ever devised. In minutes, new and old collectors around the world can pull up Gold Dragon information and photos. The Perth Mint’s site can be found at www.perthmint.com.au. But, for the best Gold Dragon photos and information, visit CMI’s new Web site at www.gold-dragons.com. (Note the hyphen.) More is planned for the site, which should be the major site for collectors and investors wanting Gold Dragon information.

Presently, much of the information in this newsletter (such as the impact limited mintage is having on prices of earlier years’ coins) is not generally available to the public. In the next few months, we plan to add it to www.gold-dragons.com. This should increase demand for the coins, and may result in the 1-oz coin reaching its production limit. In the gold bullion coin world, 30,000 coins are not many.

Silver Dragons

The Perth Mint also offers Silver Dragons, which come in five sizes: 1/2-oz, 1-oz, 2-oz, 10-oz, and a one kilo (32.15 oz). These coins are collectibles and do not offer an investment opportunity as do the Gold Dragons. Yet, Silver Dragons may rise in price over the next few years, but the high markup makes them risky investments. The table to the right shows the approximated prices at $5.00 silver and the coins’ mintage limitations. CMI recommends Silver Dragons only to collectors and as gifts.

Colorized Silver Eagles

Last year, promoters hit a grand slam when they “colorized” 1999 Silver Eagles and sold them as the “Last Silver Dollar of the 20th Century.” Despite 1999 being the biggest mintage year ever for Silver Eagles, premiums on 1999-dated Silver Eagles skyrocketed and remains high today. With that success (and a huge mailing list of 1999 coin buyers), the promoters moved next to Year 2000 Silver Eagles, offering them as “The First Silver Dollar of the 21st Century.” Never mind that this year is the last year of the 20th century, the colorized coins have been well received. Perhaps logically so, for the image of Miss Liberty draped in red, white, and blue stirs emotions.

The colorized Silver Eagles sold as high as $39.95 plus S&H, leaving a huge margin of profit. Consequently, knock-offs of the original coins surfaced, and some new versions are better quality than the originals. The Perth Mint has colorized Year 2000 Silver Eagles and turned out some of the best available. Each display case is serial numbered.

CMI is offering the Perth Mint versions at $20 each plus S&H of $3.00. We do not recommend colorized Silver Eagles as investments. They are collectibles and gift items.

Trade Deficit Soars

The US trade deficit has reached heights previously thought unattainable. The reasoning was that before we could import $400 billion a year more than we were exporting, the dollar would sink in the currency markets, and the problem would self-correct as imports became more expensive and exports became cheaper to foreigners. That has not yet happened.

Although weakening, the dollar remains the world’s currency. With the trade deficit at such high levels, however, it is only a matter of time before the dollar goes down. The question is, will it sink slowly, or will it collapse and bring on a world crisis that is not manageable?

Recommendations

Silver holds the greatest upside potential; yet, gold may make big upside moves this year. Platinum is dangerous at present levels. Silver and gold hold better upside potential and less downside risk. Until platinum again trades at prices near gold, conservative investors should avoid it. If platinum never again trades near gold, then let it go. Platinum was an excellent investment at lower prices, but at these levels is speculative.

Gold

Y2K sellers continue to pound the gold coin market. This has resulted in a two-tier gold coin market where Gold Eagles, Maple Leafs, and Krugerrands dated before Year 2000 sell $6.00-$8.00 below coins dated 2000. The Year 2000 coins have the mints’ markups in them. This is not all bad. Investors buying gold are getting bargains. However, CMI believes that gold coin investors should go with Gold Dragons and pay their small premiums.

Over the last twelve months, gold has enjoyed several strong moves up. In all cases, however, it slipped back as short-term traders and computer programs continue to trade it from the short side. However, gold refuses to be driven back the $252 level of last summer. In time, a big move up will not falter, and short sellers will learn to folly of taking the short-term view. In 1998, silver punished short sellers when Warren Buffett took delivery of 130 million ounces. A mere $30 to $40 rise that sticks could inflict comparable pain on short sellers of gold.

Silver

Circulated bags of pre-1965 90% silver coins can now be bought at spot. With silver in the $5.00 range, 90% silver coins are an excellent investment. Historically, 90% coins have carried premiums, and in a long bull those premiums will return, giving 90% coins added value. A $1.00 per ounce premium easily could be attained. One-ounce silver rounds and 100-oz bars are now selling at small premiums over spot and are good investments.

Platinum

As noted above, CMI believes that platinum is vulnerable to significant price declines. With silver and gold at rock bottom prices, why take the platinum risk? Investors still holding platinum should trade it for silver or Gold Dragons.