The big news of the week is that the gold spot price spiked over $1,000 this week before profit takers caused the price to back off to a close of $993.20. Gold has been on a steady rise since the week of January 12, when the markets were worried during the last week of the Bush administration with nothing concrete being offered by the incoming Obama administration. Markets continue to be skittish about the economy.
Recently, we have learned that the new openness of the Obama administration has a price. The administration and congress have pulled back the covers of the Emergency Economic Stabilization Act (TARP) revealing that the banks and brokerages were not using the money to open capital markets and were practicing “business as usual.” Recently, we learned that the nation’s two largest banks are not as healthy as initially reported. This is making everyone uneasy about the economy.
With the financial markets in turmoil, investors are running to the gold markets. Gold has been the traditional safe haven for the equity markets. Pundits have been reminding us how gold was used as the standard currency at the beginning of the Great Depression. With the markets failing, foreign trade partners were demanding payment in gold causing much of the United State’s wealth to be shipped overseas. This did not not leave enough gold to back circulating currency causing money to be a scarce resource. As Franklin D. Roosevelt began his presidency, he ordered a 4-day bank holiday and an embargo on the use of gold in overseas transaction. A month later, Roosevelt ordered a nationwide gold recall (Executive Order 6102).
The Gold Reserve Act of 1933 made Executive Order 6102 the law. Gold ownership and the restriction on the use of gold contracts started to ease in 1965 with full ownership granted in 1977. Under 31 U.S.C. §5118, gold contracts with the government are not permitted as well as issuing gold or silver as circulating currency. The United States was officially off the gold standard.
For us collectors, the economy may help keep the coin markets active. But which part of the coin market? Reports from the recent Long Beach Expo noted that there was strong business, especially in with gold coins. It was also pointed out that the auction at the Long Beach show held by Heritage Auction Galleries realized $13 million for a catalog that had a significant number of gold coins. I can understand why the people who manage the Long Beach Expo and Heritage Auction Galleries would want to show the bright side of the weekend, but I suspect that the reports are misleading to the overall state of numismatics.
There were no reports on silver or “common” and less expensive collectibles.
Silver, which is more abundant than gold and has significant industrial uses, is up 25-percent in 2009 while gold is only up 13-percent. It seems to be effecting the industrial market more than the coin market.
While gold may be the investment of choice for those leaving of other equity markets, other coins do not seem to be selling as well. The PCGS3000 Market Summary Index has been falling since last October. Other PCGS indices have moved lower with the exception of the Proof Gold Coin Index, which has remained flat.
Downward pressure on the coin market observed by PCGS can be traced to the news of bad economics event. With the flow of money and seizing of capital markets, buyers have less discretionary funds to purchase coins. As a result, there maybe a higher supply from people wanting to sell in order to convert their coins into spendable currency. The basics of the Law of Supply and Demand dictates that when the supply is high but the demand is low, the downward pressure caused by the lower demand will force the prices down. For those still in the market, the elasticity of demand in the overall market, which takes into consideration lowered incomes, may continue to put downward pressure on prices creating bargains for some formerly higher priced coins.
Since numismatics is an industry that relies on its customers to have discretionary income to purchase its products and since economic indicators say that people now have less discretionary income, I wonder if the positive press from Long Beach may be the result of investors entering the market looking for safe havens. The markets have seen this before in 1980 and in 1990 where the 1980 market was because of manipulation and 1990 increases was because of economic factors.
Before you run out and buy gold or gold-based investments, understand that following the two biggest gold spikes in history, gold had dipped to the lowest levels of the year within a few months months. After reaching $850.00 on January 21, 1980, ($2,178.05 adjusted for inflation), gold dropped to $481.50 on February 18, a 43-percent decline. Following the February 7, 1990 closing price of $423.75 ($684.56 adjust for inflation), gold closed 20-percent lower at $345.85 on June 14, 1980. The PCGS3000 also notes similar drops in their index during the same period.
There are quite a few analysts who are predicting that gold prices could surpass $1,500 and $2,000 per ounce. It is conceivable to think that if gold reaches $2,000 per ounce without market manipulation, we would be in a depression that could eventually make the 1930s look like a picnic in comparison.
Please remember that I am not an investment advisor or analyst. I am collector with a background in public policy trying to read the tea leaves to understand if it is time to sell my gold leaf!
In the mean time, I have cut back on my numismatic purchases. This year, I will be looking to fill the holes in the modern sections of my albums before buying higher priced coins. I will probably not purchase any coins for my registry sets and limit the number of coins I send off to be graded. I might purchase a bulk package of cents to fill up the Whitman coin board I purchased last year.
Are you limiting your collecting activities this year? Let me know by