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Gold Begins 2014 with a Bang: Asset Diversification Wins Again!

By Louis G. Navellier February 10, 2014

All of the year-end obituaries for gold are now forgotten.  The final London gold price fixing in 2013 was $1201.50, capping a 28% decline in 2013, gold’s worst calendar year since 1981 and the yellow metal’s only declining year since 2000.  Then, a funny thing happened on the way to gold’s funeral.  Stocks fell sharply and gold rallied.  On Monday, January 27, 2014, gold set a new 2014 high of $1270 in London.

As we move into February and suffer through a new series of scary declines in stocks, we see a mirror image of 2013 emerging.  During the first five weeks of 2014, gold is up about 5% and stocks are down about 5%.  Through February 5, 2014, the latest London fix on February 5 is $1256.50, for a modest $55 year-to-date gain, but that 4.6% gain looks like a Klondike bonanza compared with a 5.2% decline in the S&P 500 and a 6.9% drop in the Dow.  Last year, it paid to have a dominant portfolio position in stocks and a smaller position in bonds and gold.  Now, gold is playing its historic role as shock absorber while stocks are correcting and bonds are staging a surprising rally due to lower rates in many major currencies.


Gold Mining Shares are Like “Gold on Steroids” So Far This Year

According to Zerohedge, which tracks 55 leading stock sectors and stock indexes, the #1 performer in January was a junior gold mining ETF called “Market Vectors Junior Gold Miners (GDXJ), which rose 14%,  It has continued to soar in early February, rising another 4% to reach 18% year-to-date gains as of February 5, 2014. Meanwhile, the more established Market Vectors Gold Miners ETF (GDX) is up 11.6% in the first five weeks of 2014.  If those gains sound mouth-watering, there is an even more speculative gold mining vehicle that multiplies the already-volatile junior mining sector by three-fold:

Direxion Daily Gold Miners Bull 3x (NUGT) has risen 34.6% so far in the New Year, through February 5.  Sound tempting?  Don’t bite!  Last year, NUGT lost an incredible 95% of its value, suffering a 1-for-10 stock split and a second split of 1-for-5, netting a total jaw-dropping 1-for-50 stock split last year!

Gold mining shares are not for the faint of heart.  They have been falling for several years. They even fell in 2011, when gold was soaring to a record high.  Gold mining companies proliferated in the new century, betting on a continual rise in the underlying metal.  In effect, many junior gold mining firms are merely printing their own form of fiat currency, in the form of watered-down share proliferation.  If gold were $2,000 and rising, many of these firms could float higher, but the cost of mining gold is escalating so fast that many under-funded junior gold exploration companies end up floating more shares just to stay alive.

We wouldn’t jump on board the junior gold mining bandwagon, even though they have rallied early in 2014.  Gold mining shares leverage the price of gold on the downside, too.  Last year, GDXJ lost over 60% and GDX lost 54%, about twice the 27.8% decline in gold bullion. History shows that a gold decline is survivable – even if gold falls to $1000 an ounce – since we know that gold bullion has inherent value.  It will never fall to zero, but any number of gold mining shares can fall to zero and go to ‘money heaven.’


Gold’s Early 2014 Rise is Closely Tied to Currency Debasement

Gold rose strongly in January despite a decline in some other key commodities.  For instance, silver was down in 1% January, and two of the three worst investment sectors in January involved oil and gas.  One of them, the NYSE ARCA Oil & Gas index (^XOI) is down 7.9% through February 5.  Since gold is up while other commodities are weak, gold is serving its primary role as a monetary alternative to currencies.

Third-world (emerging market) economies are suffering currency debasement once again.  Argentina’s peso fell 14% in January. Other nations had had to raise their interest rates radically in order to stem a collapse in their home currencies.  Most of these nations (like Turkey, India and South Africa) have very active gold markets, so any collapse in currencies will drive local citizens to gold as an alternative to their depreciating currencies.  Turkey more than doubled its key interest rate to 10% from 4.5%, while raising its overnight lending rate to 12% from 7.75% and its overnight borrowing rate to 8% from 3.5%. India’s Reserve Bank lifted its benchmark rate to 8% and South Africa raised its key repo rate 0.5% to 5.5%.  

China also suffered from a crisis concerning its accounting standards for its stock earnings, but that kind of crisis only serves to drive more Chinese into the safety of gold, especially during their New Year.

China Launches “Year of the Golden Horse”

Chinese gold imports rose 51% in December due to advance buying for the Lunar New Year.  December demand lifted China’s net gold imports for the full year to a record-high 1,108.8 tons, 33% above 2012. 

Chinese New Year 2014 Year Of The Horse in Gold  3D Illustration China’s year of the Golden Horse began January 31, replacing the Year of the Snake. During New Year celebrations, many Chinese tend to buy jewelry based on the New Year’s featured creature: This year’s golden accessories tend to feature the Golden Horse – a symbol of strength, speed, energy, and health – rather than last year’s creature, the proverbial “snake in the grass,” emblematic of deception and torpor.

Gold gift giving traditionally continues in the first month of the New Year (February), so many Chinese jewelers are expecting double-digit gold jewelry (and coin) sales growth this month.  The Chinese are also cost-conscious.  They tend to buy more gold when the price is low. By contrast, U.S. investors tend to sell in panic when gold prices decline.  In 2013, the net selling of the U.S.-based gold exchange-traded funds (ETFs) hit a record 869 tons.  Most of the ETF sellers were in the United States and Europe, so you could say that about 1,000 tons of gold migrated from the West to the East last year.  Shame on the West!

The biggest news out of China is that their central bank might soon announce how much gold they hold in foreign reserves.  Jeffrey Nichols, managing director of American Precious Metals Advisors, says that China may soon tell the world that it has more than doubled its official gold reserves to over 2,700 tons in the last four years. The last time the People’s Bank of China reported its official gold holdings was 2009, when they held 1,054 tons, or about 1% of its total foreign reserves. China has been adding gold to its official reserves for years, but exactly how much has been a matter of speculation, since no official data was released.  According to Nichols, China bought 654 tons from 2009 to 2011, 388 tons in 2012, and 622 more tons in 2013. This may sound like a massive rise in central bank holdings, but it would still represent less than 3% of China’s total foreign reserves, leaving China plenty of room to buy more gold.

Gold Demand in Russia and India is Also Reviving

Russia’s central bank is also buying a lot more gold, after a four-month hiatus of no buying from August through November last year. The Central Bank of the Russian Federation reported that in December, when gold fell below $1,200 again, Russia bought 700,000 ounces of gold, bringing its total gold reserves to 33.3 million ounces (1035 tons).  For all of 2013, Russia bought 2.5 million troy ounces of gold (78 tons) so their 700,000 ounce gold purchase in December was equivalent to 28% of their annual purchases. 

We are also seeing some new indications that India’s government may consider lifting some of its punitive gold import restrictions. The people of India love gold, if given half a chance to buy gold in a relatively free market.  In late January, India’s Congress Party leader Sonia Gandhi said the government should “review” gold import duties. She told the Minister of Commerce and Industry: “You are requested to kindly look into the matter for appropriate action.” Things move slowly in India, but her action could inspire much-needed reforms.  In response to Sonia Gandhi’s request, India’s Finance Minister Palaniappan Chidambaram said that the Indian government might reduce some of its gold controls as early as March 31, the end of India’s fiscal year, but only if India’s trade deficit appears “under control.” 

The World Mints are Enjoying Record Demand So Far in 2014

Bloomberg reported at the end of January that many of the world’s leading mints are working overtime to meet rising demand for physical gold, including some of the world’s leading gold investment coins.  The U.S. Mint enjoyed its best month since last April.  According to Bloomberg, sales of gold coins by the U.S. Mint rose 63% in January, from 56,000 gold ounces in December to 91,500 ounces in January.  In addition, sales of U.S. Mint silver coins almost tripled to 4.78 million ounces, the best month in a year.

Overseas, other mints are running 24 hours a days to meet demand.  The popular Austrian Philharmonic coin has been enjoying such high demand that Austria’s mint has just added a third shift to keep that mint open 24 hours a day.  (The Austrian mint enjoyed a 36% increase in sales in 2013.)  Down under, the Perth (Australia) Mint is also operating 24 hours a day, due to rising demand (up 20% from last year). And the U.K. Royal Mint even ran out of their 2014 Sovereigns recently, due to “exceptional demand.” 

Due to high demand, some of these coins add rising premiums to the cost of buying popular gold coins.  That’s one reason why we at Navellier recommend buying low-premium gold bullion bars instead. 



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Disclaimer The information in this letter is not intended to be personalized recommendations to buy, hold or sell investments. This should not be considered as personalized trading or investment advice to subscribers. The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication. Subscribers should verify all claims and do their own research before investing in any investment referenced in this publication. Investing in securities and other investments, such as options and commodities, bullion and futures is speculative and carries a high degree of risk. Subscribers may lose money trading and investing in such instruments.