Viewpoint: Gold Will Shine When Fed ‘Talk’ Fails|
December 16, 2013
Few hobbyists would disagree that all else being equal, rising precious metals prices are a positive influence on the general health of numismatics. To be sure, there are rare coins which come to market so infrequently, that metals prices have no effect whatever on the price realized at auction. However, the general mood of the coin market – even for coins worth many times their bullion value – is highly influenced by precious metals prices. Few would argue that the psychological effect of falling precious metals prices has a very humbling effect on coin prices, even on coins made of no precious metal at all.
Like any observation about economics, there are exceptions to the rule. The crazed speculation in high-grade certified coins in 1989 was set against precious metal prices that were stable. The crash in coin prices the following year also had little connection to metals prices.
But that one anomaly aside, the health of the numismatic market across the entire spectrum is highly influenced by collector perceptions of the bullion market. The bullion market is somewhat counter-cyclical to the economy as a whole. This is especially true when compared to the financial services industry, where every product they sell is predicated on a sound and stable currency, reflected by a stable or falling gold price. And so for obvious reasons, the value of the dollar is something the banking mavens like to manage to suit their delusions of control.
The Federal Reserve has been very successful in managing the value of the dollar, even if the dollar now buys less than a quarter as much gold as it did at the turn of the millennium. (This, in spite of the rather severe sell-off in precious metals so far in 2013).
Everyone agrees the rally in metals over the past decade has been the direct result of monetary expansion. The consensus now seems to be that after more than a decade of annual price gains, the precious metals have lost their luster.
However, anyone taking a closer look at monetary policy over the past 12 years, can’t help but notice that nothing that caused the run-up in metal prices has really changed. But none of the big investors in gold look at the fundamentals. Instead they rely much more on market sentiment.
That’s not to say there isn’t a fair amount of direct manipulation. No better example of this can be found than the Federal Reserve’s use of the “taper” rumor. While the Fed would never admit it, they too watch metals prices closely as a proxy to how successfully they are managing the currency. Over the past 15 months, every rally in the metals sector has been met with the same response from the Fed. Their standard response is to roll-out the rumor about an imminent “taper” or reduction in the amount of monthly bond purchases.
However, the chances of this same trick continuing to work indefinitely are rather slim. Eventually, the Federal Reserve will make another taper threat without following through on it, and instead of a drop in gold prices, there will be a massive rally as everyone comes to the same conclusion at once. Namely, that the Fed does not have the option to taper even if they wanted to, because bond prices will collapse if they do. At which point anyone who held the course through 2013 and maintained their position in gold will be made to look like a paradigm of prudence.
This “Viewpoint” was written by Bruce Walker of Kansas, City.
Viewpoint is a forum for the expression of opinion on a variety of subjects. To have your opinion considered for Viewpoint, write David C. Harper, Editor, Numismatic News, 700 E. State St., Iola, WI 54990. Email firstname.lastname@example.org.
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