Gold on Track for Best Year Since 2011
Mike Fuljenz | November 16, 2017

Gold is up 11% this year but it has been flat in the last month and the last year since Donald Trump was elected. In fact, the closing price for gold on the day Trump won the 2016 election was $1,282.  Exactly a year later, gold closed at nearly the same price ($1,284) on November 8, 2017.On election night, gold soared briefly but then fell over the next month to a low of $1,125 on December 20, 2016.Gold’s high in Trump’s first year was $1,346 on September 8, 2017.  Gold is still on track for its best year since 2011.

Despite Rate Hike, Gold Seems Headed Up” - Barron’s, November 6, 2017

The next meeting of the Federal Open Market Committee (FOMC) is scheduled for December 12-13. According to the latest poll by CME FedWatch, there is a 91.5% chance that the Fed will raise short-term interest rates by 0.25%.  That’s important because in the last two years the Fed raised rates in mid-December and that caused gold to RISE SHARPLY. The pundits in most non-gold-oriented publications tend to predict that gold will go down when interest rates rise, since “gold offers no interest income.”

But here are the facts surrounding the Fed’s last two mid-December rate increases:

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  • On December 15, 2015, gold bottomed out at $1,049 (on the London pm gold price fix) the day after the Federal Reserve raised rates for the first time in almost 10 years.  Gold immediately took off and rose by almost $200 per ounce to $1,241 in less than two months (by February 11, 2016).
  • On December 20, 2016, gold bottomed out at $1,125 on December 20, shortly after the Fed raised rates again.  Gold then rose gradually to $1,257 in February and $1,346 by the next September.

It could happen again this year.  Even if gold fell to the low $1,200s range, it could take off again in late December.That’s the theory of the Commodities Corner column in last week’s Barron’s.  First, the article points out that gold rose 8.6% in 2016 and is on track to gain over 10% in 2017, so each year’s low gold price is higher than the previous year’s low.  Then, Barron’s explained that speculative gold traders tend to ‘short’ gold in advance of the FOMC meeting and then cover those shorts when the Fed meets. 

In trading parlance, the gold trader’s winning game plan is to “buy on the rumor and sell on the news.” Therefore, don’t be overly concerned if gold continues to trade flat-to-slightly-down.  There should be a year-end rally between mid-December and mid-February and then a gradually rising price during 2018.

Many Classic U.S. Gold Coins are Trading Near Bullion Prices

One reason we talk so much about gold bullion is that prices for many common-date classic U.S. gold coins (minted before 1934) tend to move with the price of gold.  This is not true of rare U.S. gold coins, of course, but it is true of circulated gold coins and some common-date uncirculated lower grade gold coins. In a strong bull market, these coins have historically traded at more significant premiums to the price of gold, but now the more commonly-traded gold coins are close to the price of gold bullion itself, so this marks a unique buying opportunity for leveraging the price of gold by owning classic lower grade uncirculated U.S. gold coins, like MS-62 $20 Liberties, with little “downside risk” outside of the price of gold itself. 

Gold mining stocks are also touted as a way to “leverage the price of gold,” but they don’t have the inherent advantage of rare gold coins. While a well-run gold mining stock can leverage the price of gold on the upside, it will also leverage gold to the downside, and many gold mining stocks disappear entirely due to bad management or an uneconomic mine, where it is not profitable to mine gold at a price below $1,200.  With rare gold coins you will never see them trading below the price of their “melt value” gold

Many pre-1934 low grade U.S. gold coins have recently traded at their lowest premium above gold in the last 15 years.  Some circulated gold double eagles are trading just above their melt value. At the same time there is great demand for the next tier up in quality which we recommend as an alternative to gold bullion bars and coins.We continue to recommend that investors buy some high grade classic gold coins and rare coins for their superior profit potential.

Mike Fuljenz is the Official Precious Metals Expert for Townhall Finance

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