Award-Winning Metals Market Report: June 2016

On June 23, the voters of Great Britain will decide whether or not to leave the European Union (EU), which Britain joined in the early 1970s. With a week until the decision is due, the forces of “Leave the EU” have increased sharply over the “Remain” vote. This has caused a collapse in the British pound in anticipation of the vote. This has also caused many Britons to exchange their weak pound sterling for gold. One leading British gold dealer said that the U.K. is outstripping all other regions for demand growth this month, up 59% in June. Their head of research said “we can only attribute that to Brexit.”

Goldman Sachs believes that a British vote to leave the EU would push the pound down 15% to 20%. The British Treasury sees an immediate 12% to 15% drop. The pound has fallen about 4% on fears of a British exit, but next week’s vote could send the pound sharply down, so British investors are switching to gold.

According to the Daily Mail, Brexit “is driving Londoners into the gold shops.” At bullion dealer Sharps Pixley, demand for bullion bars and coins has been rising sharply. Ross Norman, chief executive of Sharps Pixley, said that demand for Britannia coins (as legal currency, they are exempt from capital gains tax) have been particularly strong. Norman noted that younger folks are increasingly interested in gold. “We had a preconception of who the typical gold buyer was, which is male, mature and over 45. The mix of people coming through has completely rebuffed that idea – they’re often much younger, often female.”

We have criticized the Wall Street Journal in the past for downplaying gold when it is down, but the financial newspaper of record can sure sound gold-friendly when prices are up. Here are some of the headlines from the last few daily editions from the Wall Street Journal, June 8 through June 13:

· Wednesday, June 8: “Gold Rises on Weaker Dollar, Low Interest Rates: Dismal economic data from the U.S. tempers expectations the Fed will raise rates this month,” by Stephanie Yang

· Thursday, June 9: “Gold Rises as Investors Bet Against Rate Increase: Gold has fourth day of gains in past five days, hits highest price since mid-May,” by Mike Cherney

· Thursday, June 9: “The Big Bet of 2016: Joining George Soros in Gold: Investors pile into the metal, up 20% this year, and mining stocks, which have vaulted even more,” by Stephanie Yang

· Friday, June 10: “Gold Gains as Bond Yields Hit Low: Low bond yields around the world sent investors into safe-haven metal,” by Stephanie Yang

· Monday, June 13: “Gold Rises on Fears Over UK Vote: ‘Brexit’ potential, and Fed meeting, inspires buyers,” by Stephanie Yang.

The nature of a newspaper is to react to daily events, so when gold stages its inevitable correction, be sure to remember all the valid reasons cited in these articles about why gold should continue to rise, long-term.

Maybe it’s the British exit vote, or the terribly low (even negative) rates in Europe, but Europeans know that their own currency is likely to fall if the British exit the EU. Popularity polls throughout Europe are turning against EU membership. In the latest poll, 61% of French voters are against EU membership. If giant France exits the EU after the British pave the way, the European Union would be either defunct or impotent. The euro currency would collapse in such a scenario, driving more Europeans into gold.

Last Friday, European stock markets declined 2% on average and the rates on leading bonds fell to near zero. Specifically, long-term (10-year) government bond rates fell to 0.01% in Germany, so Europeans are joining Britons in turning toward gold as a safe haven. Many European banks are encouraging them through their research reports as well as through their gold-accumulation plans in European banks.

On Friday, Germany’s Commerzbank explained gold’s recovery in their “Commodities Daily” report: “Gold gained yesterday in a market environment characterized by higher risk aversion, and despite a firmer US dollar. The yellow precious metal temporarily achieved a new three-week high of over $1,270 per troy ounce. As a result of the appreciating US dollar, gold in euro terms has risen more sharply, likewise climbing to a three-week high of €1,120 ($1,273) per troy ounce. Weak stock markets and further falling bond yields presumably helped drive the gold price up.” Gold ETF demand also rose: “Holdings in gold ETFs tracked by Bloomberg were topped up by 5.8 tons yesterday in their eighth consecutive day of inflows. They are now at their highest level since November 2013.”

Denmark’s Saxo Bank also advocates gold buying. The bank’s head of commodity strategies, Ole Hansen, wrote last week: “Investors, both individual and institutional, are coming back into precious metals…. What's really driving the precious metals at the moment is the theme of low interest rates for longer, negative bond yields basically forcing investment managers across the world to look for alternatives... as long as we continue to see the tailwind from falling bond yields, from Brexit worries, and from the dollar which has been under a bit of pressure again, gold and silver will continue to perform.”

The Netherlands’ ABN AMRO sees gold reaching $1,370 by the end of 2016 and $1,450 by the end of 2017. So far this year, gold jewelry demand has suffered but Georgette Boele, their coordinator of foreign exchange (FX) and precious metals strategies expects jewelry demand to improve in China and India. “For the two largest markets, China and India, we expect GDP per capita to increase and the middle class to grow. We expect disposable income to grow as well in both countries…. An above-normal monsoon would increase income from agriculture, would result in more money being available for auspicious ceremonies and weddings. As a result, demand for gold could increase. In addition, the government recently announced that it has rolled back its budget decision to apply 1% tax collection at source for cash purchase of gold jewelry of 200,000 rupees ($3,000) and above and raised the threshold to the 500,000 rupees ($7,500). The decision takes effect from 1 June.” This will likely boost Indian jewelry demand.

(Increased gold demand and gold product sales typically introduce more buyers to gold coins. This results, over time, in more rare gold coin buyers and increased prices for more rare gold coins.)

Gold rose most rapidly last Wednesday morning, from a $1241 London pm fix on Tuesday to $1263 by 10 am Wednesday, then to $1270 on Thursday and as high as $1277 on Friday before correcting slightly to $1275. The London pm fixes rose $34.50 (+2.8%) from $1241 on Tuesday to $1275.50 on Friday. On Monday morning, June 13, gold rose another $10 to $1285. As usual, the key factor in gold’s sharp rise last week and early this week is the rising likelihood that the Fed will not raise short-term interest rates at its scheduled meeting this week (the announcement will be made on Wednesday afternoon, June 15). With negative interest rates in Europe and Japan, and very low rates in the U.S., gold remains attractive.

I am currently captivated by the idea that platinum is $300 cheaper than gold.

Platinum was $200 cheaper than gold at one time. In 1974. During the financial crisis, Pt was $50-$60-$100 cheaper than gold and that was the biggest of big deals. Now it’s $300 cheaper.

Platinum is over 10x rarer than gold. And slightly more difficult to chemically refine.

Yes, I know that electric cars, the saviors of our civilization, need no cat converters. Yes, I know that automakers are trying like mad to substitute palladium for platinum.

I also know that platinum’s extraction cost is well over $1K/ounce. The last time I sold some Pt (about 2011) it settled out at about $1900. Now it’s about half that.

That something makes or does not make sense to you or me means absolutely nothing. We cannot compare the subjectivity of what fits or does not fit into our individual peanut brains with actual real numbers we can look at and agree upon with certainty and perfection. There is a worldwide spot price for Pt and you or I or anyone else can walk into a coin/bullion dealer and buy a readily recognizable and difficult to counterfeit form of same (such as a Candian Maple Leaf or a Pamp Suisse bar which comes in a serialized assay-package) for about $60 over that world-known price. (That margin, the seignorage, is inescapable) Should they want to know, anyone in the entire known universe can look up that market price and know it within a dime. That’s actually quite a bit different than me looking up the price of hamburger at Safeway and you looking it up at Kroger.

As an example, I have absolutely no explanation how anyone with functioning brain cells could vote for a Hillary Clinton, but 40% of the population will, with near perfect certainty.

When I started buying silver in 2000, it was my impression that the $4-5 price of it (then) was less than the cost of production. And the example I used was, a slice of bologna. You cannot birth a cow, raise a cow, feed a cow, take care of a cow, slaughter the cow, then grind up the cow and stack slices of bologna into a plastic container, having refrigerated that stack of slices while being transported to your grocer where he must in turn keep the package of bologna slices refrigerated until they sell, for (say) a penny a slice.

That is not my view today, by the way and appropos of nothing.

All the research I am doing right now while this idea has glimmer to me says that Pt costs well north of $1K/oz to dig out of the ground, grind up, refine, assay, and press into a coin or bar such that it can be conveniently transacted, eg; swapped for green cash.

It doesn’t make sense to me either.

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