Friday, October 21st, 2016 MST

IMF, Swiss National Bank, Bank of England Plan Gold Sales

Monetary Digest, June 1999

While Dow Theory analysis suggests that stocks are enjoying their final surge, technical analysis of gold’s price action indicates that the yellow metal has been building a base for a bull market. In August 1998, gold touched $272, breaching its 1985 low of $281. By October, however, gold had climbed to $300. Afterwards, gold prices drifted lower but did not approach the August 1998 low, suggesting that the $272 August low was the bottom, ending a 19-year bear market for gold.

According to Richard Russell (Dow Theory Letters, April 21, 1999), gold made an “important bottom” on April 5 when it briefly traded below $280 but rallied quickly to just short of its 34-day moving average at $286. The April 5 low was significant because it appears to have been a “higher low.” Since then, gold has climbed above its 34-day moving average, showing good strength. Russell sees gold’s 144-day moving average, which stands at about $293, as the next big hurdle. As far back as his February 24 Letter, Russell wrote that his study of gold’s weekly chart indicated a “five-month bottom forming.”

However, May 7, after gold had risen to $287, the Bank of England (Great Britain’s central bank) said it planned to sell 13.3 million ounces of gold. Gold dropped $7. The BOE announcement came on top of already-planned sales by the Swiss National Bank and the IMF, which the market had shrugged off. Gold had climbed steadily in the face of the IMF and Swiss announcements. Although the BOE sales will be small, the news hit the market unexpectedly and sent prices reeling.

The BOE, IMF and Swiss sales will add some 57 million ounces to the supply over the next ten years if all the gold is sold. Oddly, the Swiss will be dumping the lion’s share of the gold (41.8 million ounces), and gold rose in the face of that news. The IMF announcement of plans to auction 500,000 to one million ounces, although widely publicized, drew yawns from the market. However, the BOE announcement stopped–at least temporarily–gold’s climb. Evidence suggests that the auctions will feed a voracious demand for gold. More on this later.

When gold peaked in 1980, no one expected the ensuing bear market to last 19 years. However, Richard Russell predicted at the November 1980 Gold Conference in New Orleans that gold’s spike to $850 “probably meant the end of the bull market in gold for up to ten years.” His statement, made before probably 3,000 people, produced a chorus of groans, moans, and some chuckles.

The Gold Conference was built on goldphiles, people who believed in gold and expected it to continue to rise. Talk of a ten-year bear market was unacceptable. The market sentiment was ripe for gold. Deficit spending was massive, inflation was strong, the Cold War was hot, and the Russians had invaded Afghanistan, with the Middle East oil fields a short tank ride away. How could gold not have been a good investment?

Using 20-20 hindsight, it is clear that investors should have dumped their gold in 1980 and bought stocks. It would have been following the “contrary opinion” philosophy that calls for doing opposite to what the masses are doing. It would have been brilliant–and profitable! Today, a small number of investors have begun abandoning stocks and buying gold.

Most reports about gold’s low prices are intended to disparage gold, to show investors what a horrible investment it has been. Ironically, such reports remind value-minded investors that gold is a bargain at these levels. Gold’s $272 in August 1998 was its lowest price since it was $215.50 in 1979. From there, gold climbed to $850 in January 1980.

Still, some pessimists predict gold will hit $250 before it moves higher. They cite, among other reasons, upcoming IMF gold sales, the likelihood of more central bank sales, a strong dollar, a robust U.S. economy, and a stock market that defies gravity. The Economist, a longtime gold bear, slams gold about once a year. In a recent attack, titled “Tarnished Gold,” it noted that the “cost to the Swiss of interest foregone by holding gold rather than American Treasury bonds is equivalent to around $400 a year per household.”

During prosperous times, people tend to forget that U.S. Treasuries are promises to pay by a country with a national debt of $5.53 trillion, that when the U.S. is not robbing the Social Security Trust Fund it is running a budget deficit, that its trade deficit has doubled in a little over a year, that its military is now a shadow of what it was during Desert Storm, that its military is stretched so thin that it cannot even fight Serbia without calling up reservists–and, that’s with the “help” of NATO. Finally, they forget that Treasury bonds are pieces of paper, one of the cheapest commodities known to man.

Gold has been valued in all civilizations, and because it is virtually indestructible, it is the ultimate financial asset. Its value does not depend on someone else’s ability to perform. No one holding gold ever had it made worthless because his country lost a war or printed too much paper money.

Gold has been used as money since time immemorial, and that’s why paper money should be only a receipt for gold. During prosperous times, however, such basic principles are forgotten. Today is no different.

Oddly, the biggest gold bears are the world’s major bullion dealers, not the Certified Mints but the big bullion houses which handle transactions for central banks, gold producers, hedge funds, and huge investors. These bullion houses, most of which are based in London, number fewer than ten. They make money in more ways than just putting buyers and sellers together. One of their big sources of income involves lending gold for forward sales, a practice that temporarily increases the supply of gold.

Forward sales involve producers borrowing central bank gold through the major bullion dealers and selling it. The bullion houses, with their long-standing status and substantial credit ratings, guarantee the central banks that the gold will be repaid. The producers promise to repay the borrowed gold from future production, and because they are substantial gold producers, they plausibly can repay the gold, making them good credit risks. So, the borrowed gold is sold, and most of it goes for the manufacture of jewelry worldwide. Without forward sales, the gold market would be greatly out of balance, with demand significantly exceeding production plus scrap recovery. More on this later.

The big bullion houses are the driving force behind forward sales. They convince the central banks to lend, for which the central banks receive a “lease rate,” normally in the 1-1/2% range. This enables the central banks to “earn interest” on their gold. For this interest, central banks are depressing the price of gold, a significant reserve asset of most western world central banks.

An estimated 80 central banks lend gold for forward selling. However, normally less than five central banks sell gold each year. And, because most central banks don’t sell, they really don’t care what the price of gold is. Most are locked into their gold positions by law, or, as in the case of the Swiss, by constitutional requirements.

In developing their forward sales business, the bullion dealers had to convince both the borrowing producers and lending central banks that gold would fall farther or at least had limited upside potential. When gold traded at the $400 level, this was relatively easy, and major gold producers signed on.

By paying the lease rate, the forward sellers sold borrowed gold and used the proceeds for other purposes, such as capital improvements. With the cost of borrowing gold at 1-1/2%, it was cheaper to borrow gold and sell than it was to borrow money. Logically, the next step was to forward sell gold and pay off debt. Since that went so well, the more aggressive producers borrowed more gold, sold it, and used the proceeds to invest in U.S. Treasuries. It was found money. Borrow at 1-1/2% and lend to the U.S. at 5%.

As long as the price of gold stays down, everyone involved benefits. The bullion dealers get their cut; the central banks receive “interest” on an otherwise “sterile” asset; and, the producers have access to cheap money. Consequently, the bullion houses manage a campaign to convince the producers and the public that the gold’s upside potential is limited.

A research of media coverage of gold would be hard pressed to turn up any significant positive reports or articles on gold over the last ten years. Most coverage has been about central bank sales. Then came the news that the Swiss would vote on severing their constitutional link to gold, giving the government the green light to sell up to half their gold reserves. Now, we hear Bill Clinton coming out in support of IMF gold sales with the money to be used to provide debt relief to Third World nations. (Actually, the proceeds will be used to provide relief to the banks and institutions that lent the money. Without “international relief,” the money will not be repaid. It’s another bank bailout.)

CPM Group’s Gold Survey 1998 noted that “it often was not the actual metal entering the market, but the announcement of central bank sales that depressed gold prices.” Most sales are reported several times, and usually after they have taken place.

Such reporting often leaves the impression that the sales are imminent or planned when they have already occurred. And, the slant of the articles is always negative. Two examples are discussed below. Interestingly, both are from England.

The Reuters release about the BOE’s sale said that the “move left a beleaguered gold market reeling,” that Britain “had decided to ditch an underperforming asset,” that it “was a body blow for gold’s status as a global reserve asset.” Buried in the release, but not expounded on, was the potential negative impact on the dollar. Reuters noted that the proceeds would be invested in foreign currency assets, with around 40% put into dollars, 40% into euros, and 20% in the yen.

As the BOE sees it, the new, untested euro now has equal status with the dollar, which has been the world’s reserve currency since the end of WWII. And, despite Japan’s massive printing of the yen to stimulate its economy, the yen was given significant status. The BOE has taken a slap at the dollar. Or, maybe, it’s a signal that the BOE has started easing its position in the dollar. Such a move worldwide would have a very negative impact on the dollar. In the U.S., it would mean massive inflation and stronger gold prices.

The Economist’s “Tarnished Gold” article was equally slanted and not balanced in any way, failing in its responsibility to present fair, unbiased reporting. Below are comments from that article:

  • “together with the IMF, central banks have 34,000 tons of gold, equivalent to 13 years mine output.”
  • “official sales rose last year to 412 tons, equivalent to one-sixth of new mine output.”
  • “Over the past two decades, gold has been a lousy store of value, failing to keep pace with inflation, and it has massively underperformed equities and bonds.”
  • “fears of further gold sales by other central banks will continue to weigh heavily on prices for years to come. Even if demand for gold remains strong, it is hard to imagine a sharp rebound in prices.”

Readers with no other information about the gold market can only be left thinking that an investment in gold is daft. In a balanced article, however, readers would have had an entirely different impression of the outlook for gold. But, the purpose of the article was to paint a hopeless picture.

When publications such as The Economist write about gold, invariably they contact sources in the major bullion houses. After all, who knows more about gold than the persons trading it? Now, because it’s to the bullion house’s benefit for the price of gold to stay down, they cannot be expected to supply positive information about gold.

Regarding the 34,000 tons, The Economist failed to mention that despite central banks sales, total central bank gold holding are down only marginally since 1965. While central bank sales are widely reported, central bank purchases are rarely reported. As CPM notes, it’s not the gold entering the market that depresses gold’s price but the reporting of the sales.

As for the statement that “official sales rose last year,” it’s suspect. According to CPM Group’s April Precious Metals Investor, in 1997 net sales totaled 20 million ounces, in 1998 about 13 million, and are projected at 11.4 million this year. The Economist could have easily contacted CPM Group and obtained those statistics. The Wall Street Journal frequently quotes CPM analysts. In fact, CPM’s Gold Survey 1998 was out–and, undoubtedly, The Economist had a copy–when the “Tarnished Gold” article ran.

As for gold being a lousy store of value over the past two decades and under-performing equities and bonds, that’s accurate. Despite massive deficit spending, gold sank to a 15-year low. The last two decades witnessed the disintegration of the Soviet Union, and ushered in a feeling of prosperity. Remember Congress’ rush to spend the “peace dividend?” Congress became so complacent that it let Clinton cut in half our military. During periods of such confidence, investors gravitate toward paper investments and eschew the metals. Investors should look to the future, not the past, when considering investments.

CPM Group sees “the period of high net sales of central bank gold as having passed, leading to a tightening physical gold market.” To many, the recent IMF, Swiss and BOE announcements make CPM assessment flat-out wrong. But, remember, CPM is talking about net central bank sales. Some central banks will see these sales as opportunities to add to their gold reserves. More on this later.

Ironically, the last (and the first) IMF sale coincided with the largest increase in gold prices in history. From 1976 through 1980, the IMF sold 25 million ounces and returned another 25 million ounces to member countries. From 1975 through 1980, the U.S. government sold 17.1 million ounces. The sales were part of an attempt to “demonetize” gold after the Bretton Woods agreement collapsed in August 1971 with the closing of the gold window. The sales were supposed to destroy all interest in gold and show the world that paper money and floating rates were the future.

When Richard Nixon closed the gold window, making the dollar no longer convertible in gold by foreign governments, he raised the official price of gold to $40.22/oz. When Americans regained the right to own gold on December 31, 1974, gold was $185. In January 1980, gold topped $800 on all world markets. Sometimes official gold sales feed the market instead of depressing it.

As the IMF, Swiss, and BOE gold sales approach, here are some facts the media will not report. The physical gold market today is twice the size it was during the 1976-1980 sales. The 8.4 million ounces sold per year by the IMF and the U.S. then added more than 15% to total annual supply. The planned sales will increase supply by a larger amount that today is only 5.5% of the annual demand.

In view of the above, The Economist’s “fears of further gold sales by other central banks” seem off base.

Now, final notes on the dangers of forward sales. It is estimated that forward sales total 120 million to 250 million ounces, or two to four years new mine supply. These are huge numbers compared to central bank sales. If the forward sellers maintain only their present positions (Forward sales are short positions.), demand soon will outstrip supply by a wide margin. So, to keep real pressure on the gold market, the bullion houses will have to convince both the producers and the central banks to increase forward sales.

If forward sales, central bank sales, and IMF sales are not continued, the gold demand will exceed mine production plus scrap by wide margins–and the price of gold will rise. (The price of gold may rise for other reasons, such as war, financial crisis, or a collapsing stock market.)

Conspiratorial theorists believe that the BOE announcement, which came so quickly, was orchestrated by the bullion dealers and anti-gold BOE as one last attempt to keep the price of gold down. After all, gold ignored the announcement of the Swiss sale, which is huge compared to other central bank sales this decade. Perhaps, the forward sellers will use this to unwind their short positions.

Gold may not be modern central bankers’ favorite asset. Still, they are responsible for looking after the gold their respective countries own. They recognize that the gold they have lent is at risk because it was sold to industrial users and consumed, most of it in the jewelry industry. Loaned gold cannot be recalled per se; loaned gold has to be replaced by newly-mined gold or other borrowed gold.

Forward selling is akin to borrowing short term and lending long term, a strategy that can be profitable but is always dangerous. There are limits on the risks the central bankers want to take. Remember that they are bankers.

CPM Group maintains that investment demand is the key to gold prices, that shifts in investor interest can cause sharp fluctuations in gold prices. Investment demand is more important statistically than central bank gold sales, jewelry demand, mine production, or secondary supply.

Investment demand is the most dynamic component of the gold market. Although variations in the physical flow of supply and demand tend to remain within historical limits from year to year, investment demand can undergo wild fluctuations because it is linked to so many different variables, ranging from conditions in the gold market to general economic conditions, to perceived and real financial crises and to the performances of competing assets.

In 1993, for example, investors bought nearly 23 million ounces, moving gold’s price sharply from the $325 level to nearly $400. The following three years, however, investors ignored gold. In recent years, investors have stepped up gold purchases but not yet to the 1993 level. The stellar performance of stocks, undoubtedly, was a contributing factor. High real rates of return on bonds were another.

Now, though, CPM sees the gold market becoming increasingly tighter and the trends that have pushed gold prices lower as poised to reverse themselves. Although the demand for gold was down 11% worldwide in 1998 because of the Asian crisis, the fourth quarter of 1998 posted a record demand for nearly 26 million ounces, the highest level ever for any three-month period. Strong demand in the U.S., Europe, Brazil, and Mexico and a steady demand in the Middle East more than offset the continued impact of the economic and currency crises in several Asian countries. Demand in India set a record for the fourth year in succession, and US demand rose 18% to an all-time high. Additionally, the Asian economies appear to be reviving, which will add to the demand for gold.

Finally, gold’s fundamentals cannot be ignored. The average cash cost of production worldwide is around $280/oz, with full-in cost around $320. Thus, the gold mining industry is suffering and could not continue producing at anywhere near present levels if the price of gold were to fall below $280 for any significant period of time. In fact, although mine production is expected to grow this year and next, the rate of growth will be relatively slow by historical standards due to the lower gold prices in 1997 and 1998.

As can be seen in the table below, demand exceeds supply. Central bank and forward sales make up the shortfall. Until the fourth quarter of 1998, fears of more central bank sales kept investors away, but buyers seem to have put those concerns behind them. Recent strength has been in the face of proposed IMF sales and a Swiss referendum approving the sale up to half of Switzerland’s gold reserves.

If the bears cannot drive gold below the August low of $272, it will be extremely bullish for gold. Even if gold drops below $272, it will not be a “market” move but a short-lived manipulation. Many investors are not afraid of gold going lower; they see gold below $300 as an opportunity, especially when Gold Eagles can be bought below $300. There remains the real possibility that CPM Group and Richard Russell are right in that gold has turned up.

The bears, however, will not go into hibernation easily. They will flood the media with repeated articles about the proposed IMF sales (nearly a certainty), the Swiss sale, and the Bank of England sale. Always, they will bring up the threat of other central bank sales. No where will you read that the total amount of gold to be sold is about the same as what the IMF and the U.S. sold in the ʻ70s when the physicals gold markets were half the size they are today. Nor will you be reminded that gold climbed to $850 during the 1975-1980 sales.

Now, for the wild card that sends chills down the backs of gold bears. In the May 1998 issue of China Gold Economy, Liu Shanen, Deputy Director of China’s Development Research Centre, called for his country to increase its gold reserves to as high as 48 million ounces. Presently, China holds 12.67 million ounces, which total only 2.3% of China’s reserves.

China’s reserves exceed $154 billion, ranking second in the world. Japan is number one. But, China’s foreign trade, the source of a nation’s reserves, is growing more rapidly than that of any other country. Consequently, China’s reserves grow daily.

Liu noted that in 1973, China’s gold reserves stood at nine million ounces, equivalent to $1.6 billion, while the foreign exchange in the form of U.S. dollars amounted to a mere $83 million. Thus, gold represented 95% of China’s foreign exchange reserves.

Today, with gold being only 2.3% of China’s reserves, Liu sees the ratio as too low by international standards and much too low compared to other major economies. Among the top 12 gold reserve countries, only Japan’s ratio of gold to foreign exchange is roughly the same as China’s.

He also wrote, “The current global financial crisis demands greater financial stability and only gold has the time-tested stability that makes it our primary means for avoiding financial risk and increasing financial stability. It is absolutely correct and necessary to increase gold reserves.” Mr. Liu sees massive holdings of U.S. treasuries as having risks.

If the Chinese move to increase their gold holdings, they will buy quietly. However, when it becomes known, it will turn the gold market upside down. Additionally, the Chinese know the favor they’re doing the U.S. by keeping most of their foreign reserves in dollars. However, China’s theft of U.S. nuclear technology can only serve to create tension between Congress and China. The NATO bombing of China’s Yugoslavian embassy won’t help either. The Chinese could dump a bunch of U.S. treasuries and buy gold just to show the U.S. they’re willing to play hardball.

Furthermore, Chinese buying gold could cause Japan and Taiwan to convert some of their massive holdings of U.S. treasuries into gold. This could cause everyone to jump on the bandwagon, replicating the gold bull market of the late 1970s. Now is the time to be adding to gold positions, not being scared by slanted news stories.

It’s Still the Wildest Stock Market Ever

The March Monetary Digest discussed what looked like a classic Dow Theory top for the stock market. The Dow Industrials and the Transports had made tops in April 1998, after which the Industrials went on to make still higher tops while the Transports refused to follow. In fact, the Transports made lower highs, adding credence to the opinion that the stock market had peaked, with the various averages topping out at different times.

Now, though, the Dow Transportation average has rallied strongly, rising above its April 1998 high. But, does this new high in the Transports mean that a bull market is still in place? No, not according to Richard Russell.

Russell says that the long time lapse of the Transportation confirmation–the year it took to reach a new high–makes it “a less valid final confirmation.” He says the new high doesn’t have any forecasting significance.

Russell sees the stock market as having entered a highly speculative stage. Such optimistic activity sucks into the market people who otherwise would not invest in stocks, and certainly not to the extent Americans have plunged. Over 50% of American families now own stocks or mutual funds, by the far the highest percentage of public ownership of stocks in history. Mutual fund assets now exceed bank deposits. Knowledge of what drives stock prices is not a requirement for investing.

If you ask what causes stocks to go up, you’re likely to hear a dissertation on liquidity, the brilliance of the Fed Chairman Alan Greenspan, or the geopolitical significance of the United States in an unstable world. Or, you might hear it’s a combination of low inflation and low interest rates, both of which contribute to a solid economy. Still, recently a morning CNN newscaster asked a stock analyst why stocks were doing so well. The answer was dumbfounding. “Stocks are rising in response to a slowing economy which means the Fed won’t have to raise interest rates.”

First, if the economy is slowing, that means lower earnings, which should portend weaker stocks. But, no, stocks rose on reports of a slowing economy. The statement seems to imply that there is some utopian world in which stocks will continue to rise as long as no one analyzes the situation too closely. What the statement really meant was that if the Fed doesn’t raise interest rates, liquidity will remain good. It’s liquidity that’s driving today’s stock market, not dividends, not even future income.

Today, we’re also told that the wealth of the baby boomers is being poured into the stock market because they have no where else to go. Collecting next to no dividends on their stocks (The Dow Industrials pay a paltry 1.45%, the Transports only 0.82%, and the Utilities 3.56%), the baby boomers have forgotten about income. They invest for stock appreciation, and who could blame them? They’ve earned some 20% per year over the last five years, based on the Dow Industrials’ climb.

Today’s stock earnings–or expectations of future earnings–do not justify such high stock prices. No one’s investing for income; people are in the market because they think someone will come along and buy their stocks at higher prices. It’s called the Bigger Fool Theory. It occurs in every mania, be it tulips, the great railroad boom, Florida land, or stocks. All manias end, however, with disastrous results. This one will be no different.

Generally, the greater the excessiveness of a bull market, the more catastrophic the bear market that follows. The major bear markets of 1929-1932, 1937-1942, and 1966-1974 took the yield on the Dow Industrials to 6%. If the Industrials were to decline to yield 6%, they would hit the mid-2000s. If a recession accompanied such a decline and earnings fell, resulting in lowered dividends, the Industrials could drop below 2000. The highs of the 1929 stock market were not reached again until 1954. Adjusted for inflation, it was in the 1960s.

This is a dangerous stock market. Only people who are comfortable at Las Vegas dice tables should be in it. For senior citizens, a bear market lasting five to seven years before bottoming out, could be disastrous. A five to seven-year bear market would mean maybe 15 years before present levels are again reached. Russell sees gold as having a better risk/reward ratio. “The risk is lowest for an item that has suffered a long decline and is finally turning bullish. To my mind, gold fits that definition.”

Premiums Fall on Y2K Coins

As the March Monetary Digest was mailed, the premiums on the more popular Y2K coins were peaking. Bags of 90% pre-1965 U.S. coins topped out with premiums pushing $2.50, about 50%. The 1/10-oz Gold Eagles sold at 30% over spot; normally, they can be bought at 12%-13% over spot. As this is written, the premiums on most coins are back to levels before the surge of Y2K buying.

Pre-’65 coins still carry a premium of about 70 cents, which is reasonable. However, a year ago, during the scramble by traders to cover silver they sold to Warren Buffett, bags of 90% could have been bought at $4400, which was ten cents an ounce below spot. The years before the Buffett purchase, 90% bags could have been bought near spot. During those years, 90% bags held the #1 position on MD’s recommendation page.

Many of our clients can attest that we spent a lot of time talking them out of buying 1/10-oz Gold Eagles at premiums of 20%, 25%, and 30%. We recommended 1/10-oz Gold Maple Leafs or 1/10-oz Australian Kangaroos as alternatives. Eventually, though, premiums on those coins climbed as well. Today, however, the premium on 1/10-oz Gold Eagles is normal, and investors wanting gold for Y2K protection should buy them.

People wanting silver for Y2K protection should choose between 1-oz silver rounds and circulated 90% silver coins. The silver rounds have a slight edge in that they are pure silver (giving them better resale value) and because they have their silver content stamped on them, which makes them easier to trade. Few people know how much silver is in pre-’65 coins. (Half-dollar: .36 oz; quarter: .18 oz; dime: .715 oz. A silver dollar contains .77 oz, but silver dollars are not good buys for Y2K purposes; their premiums are too high. In fact, the premiums on silver dollars are ridiculously high, and they should be traded for other forms of silver.)

Premiums on Silver Dollars Weaken

The March Monetary Digest illustrated reasons for trading silver dollars for bullion silver. Although the premiums on silver dollars have fallen slightly, investors sitting on silver dollars should still consider trading them for other forms of silver. In a strong move to $10, which is possible, silver dollars may not move at all.

Premiums on old U.S. gold coins are still high. Old U.S. gold coins should be traded for bullion coins. Gold Eagles are the best. Actually, trading old U.S. gold coins for silver makes the most sense; however, silver’s bulk and weight cause problems for some investors. People unable to handle silver should stick with bullion gold coins.

Maple Leaf Premiums Increased

The Royal Canadian Mint recently raised its prices for Maple Leafs, which will make the Gold Maple Leafs $2 to $3 per ounce higher than comparable Gold Eagles. The Silver Maple Leafs now sell for about $2 over spot.

The increases were not related to Y2K buying but a desire by the RCM to increase profits. It is likely the U.S. Mint will follow suit.

Avoid Old Foreign Coins

Do not get talked into buying old foreign gold coins such as British Sovereigns, Swiss Helveticas, French Roosters, Danish Mermaids, Swedish Kronors, etc. Generally, these coins sell at higher per ounce prices than comparable Gold Eagles. Foreign coins also have the disadvantages of not being stamped in English, not having their gold content stamped on them, or containing weird amounts of gold. For example, many contain 0.1867 or 0.2354 ounce, amounts many people do not relate to. Coupled with their gold contents not being stamped on them, they could be difficult to use in emergencies.

When laying out your money for gold coins, always consider the possible circumstances under which you may have to covert them back to paper money. Any coins can be sold to dealers, but you may want to or have to trade them to friends, tradesmen, or merchants. Americans prefer coins stamped in English, coins denominated in ounces or fractions of an ounce they understand, such as 1-oz, 1/2-oz, 1/4-oz, or 1/10 oz. Having coins with their gold contents stamped on them make them easier to trade.

Finally, do not fall for “These are non-confiscatable coins” stories. There are no such coins. Past issues of Monetary Digest have covered this topic extensively. Call if you would like one of those back issues sent to you, or visit our Web site ( and read “Myths, Misunderstandings, and Outright Lies–The things coin dealers tell you to get you to buy overpriced coins.” If you’re still holding old U.S. gold coins, you should consider trading them.

Make Your IRA Golden

Now is an excellent time to convert IRAs to precious metals. Gold appears to have made a bottom but is still trading within a few dollars of a 15-year low. Silver is in a solid long-term uptrend, and its soundness as an investment was validated when Warren Buffett purchased 130 million ounces. Platinum remains explosive, with strong industrial demand. The development of fuel cells, which use platinum as a catalyst, will add to demand.

American Church Trust (ACT), Houston, Texas, offers a simple, inexpensive self-directed IRA. ACT is regulated by the Texas Department of Banking and administrates more than 12,000 IRAs. CMI has worked with ACT for nine years and has found its personnel to be informed, professional, and easy to work with. ACT uses Macintosh computers which ACT believes to be fully Y2K compliant.

ACT stores the metals in Republic National Bank of New York’s depository, which is licensed and approved by all the major commodities and futures exchanges. RNB-NY is one of the most profitable and best run banks in the world. CMi is confident that RNB-NY will be Y2K compliant and that metals stored at its depository will be safe into the new millennium.

Establishing an IRA with ACT entails two easy steps: 1. Doing the paperwork. This sets up the account and authorizes the transfer of funds from your present IRA. (You do not have to move all your IRA investments to ACT.) 2. Directing CMI which precious metals to buy. After the metals are delivered to Republic’s depository, ACT pays CMI, completing the investment.

Step #1 requires a check for $125, which pays the first year’s annual fee of $50, the first year’s storage fee of $50, and the initial transaction fee of $25. Thereafter, ACT charges 1/8 of 1% of the IRA’s asset value, with a minimum of $35 and maximum of $150.

Numerous forms of precious metals are approved for IRAs. The most popular are 1-oz Gold Eagles, 1-oz Platinum Eagles, and 100-oz .999 fine silver bars.

Investors wanting to discuss setting up an IRA with ACT should contact CMI at 1-800-528-1380. If after getting your questions answered you want to proceed, we will mail ACT’s forms to you.

If you are interested, we urge you to move quickly. Current low precious metals make the metals attractive alternatives to stocks and other paper investments which may be too fragile to withstand the next few years.


New Investments:

We rank the metals investment potential as follows:

A. Silver.
B. Platinum.
C. Gold.

Silver continues to hold the best upside potential of the metals. While gold’s price has been depressed because of central bank sales, forward sales, and negative publicity, silver’s price has shown solid strength. Additionally, no government cares how high the price of silver goes. Gold is another story. When gold’s price rises, it reflects unfavorably on paper currencies. Central banks hold no huge reserves of silver which they might dump.

The same is true for platinum. No big stockpiles of platinum threaten the market. Yet, the demand for gold outstrips supply and its price may explode when the mining companies and bullion houses have to unwind their forward sales positions. Still, in view of economic conditions, industrial demand, and other factors, silver is #1, platinum #2, and gold #3.

1. One-ounce silver rounds and 100-oz silver bars.

With the premiums coming down on circulated 90% U.S. silver coins, they are more favorably priced. However, one-ounce .999 fine silver rounds hold a slight edge for Y2K purposes. Silver rounds have their purity and silver content stamped on them; 90% coins do not.

For investment purposes, go with 100-oz .999 fine silver bars.

2. Platinum Eagles or Platinum Maple Leafs.

Platinum could explode due to the political instability of Russia and South Africa which together produce most of the world’s platinum. Russia is in near chaos. In some parts, criminals have more control than the government. Crime is also rampant in South Africa, and Johannesburg has one of the world’s highest homicide rates.

Like silver, platinum is essential to many products we take for granted. By some estimates, platinum is used in the production of 20% of today’s products.

3. Gold Eagles, 1-oz, 1/2-oz, 1/4-oz, and 1/10-oz.

Although silver has been used more as money than has gold, gold remains the ultimate safety haven in the minds of many people. It is compact, making it easy to store and conceal great wealth. It is universally recognized and can be converted to cash easier than stocks. With gold, you have money under all circumstances.

Chose the sizes that fit your needs, then buy the coins with lowest premiums. Gold Eagles have their gold contents stamped on them in English. Avoid the European coins of odd weights which do not even have their gold contents stamped on them. Besides, European coins carry higher premiums than comparable Gold Eagles. With the easing of Y2K buying, the premiums on Gold Eagles have returned to normal levels, making them the best way to invest in gold.


1. Trade old U.S. gold coins for gold bullion coins. Previous Monetary Digests have outlined this recommendation. If you still own old U.S. gold coins, call and get the facts on trading them for gold, silver, or platinum.

2. Trade silver dollars for 1-oz .999 fine silver rounds or 100-oz .999 fine silver bars. This recommendation also has been outlined previously.