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Super Low Fear Index Signals Dangerous Complacency

Stefan Gleason on the Biggest Mistakes Precious Metals Investors Make


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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up we’ll hear an interview with Money Metals president Stefan Gleason, who was a featured guest during the recent 360 Gold Summit. Stefan addressed the fundamental question of “why precious metals” and also gave some helpful tips on how to avoid making big mistakes when investing in gold and silver. Don’t miss this fundamentally important and enlightening conversation coming up after this week’s market update.

Gold and silver markets pulled back this week, as the Dow Jones Industrial Average rose to hit a new milestone. On Wednesday, the Dow closed above 20,000 for the first time ever.

U.S. stocks have been in a major bull market since the 2009 bottom. Those who bought near those lows and held on for the ride have certainly been rewarded. But buying stocks back when they were out of favor wasn’t easy. You had to be a contrarian, and you had to have the wherewithal to not get shaken out as the stock market climbed the proverbial wall of worry.

Fast forward to 2017, and we’ve gone from maximum fear to maximum complacency – or something close to it. Just take a look at the latest readings on the VIX volatility index. The VIX is also known as the fear index, because it options pricing data to measure how much investors are willing to pay for upside potential or downside protection.

As the Dow hit 20,000 this week, the VIX fell to its lowest level since 2014 and second lowest since 2007. The low in the fear index in 2007 came early in the year. The peak in the stock market came a few months later that year. So while the VIX may not be a precise market timing tool, it can flash early warning signs of excessive complacency.

It’s too early to tell whether the next sell off in stocks will represent the start of a major bear market. Bull markets typically end when major divergences start showing up in advance/decline ratios, momentum gauges, and underlying fundamentals.

One divergence we’ll be keeping an eye on is the Dow to gold ratio. Even though the Dow made a new nominal high this week, it didn’t exceed the high it made back in December in terms of gold. That high was a bull market high vis-à-vis the 2009 bottom in stocks, but it wasn’t an all-time high. Not even close.

From 1980 to 2000, the Dow to gold ratio moved from as low as 1 to 1 to as high as 43 to 1. Since 2000, it has fallen to as low 6 to 1. The Dow to gold ratio now stands at around 17 to 1. Should it ultimately revisit the 1:1 ratio, we’d be looking at a massive stock market crash, an explosive move higher in precious metals prices, or some combination of both.

Could gold prices one day meet the Dow at 20,000? It’s an extreme scenario, to be sure, but it’s not as farfetched as Wall Street would have you think. There is historical precedent for a 1 to 1 ratio. Yet the financial services industry and the financial media can’t see it happening again because they are institutionally biased against precious metals. They prefer to laugh at or ridicule gold bugs rather than consider their arguments and the possibility that they might just be right.

President Donald Trump faced scorn and snickering from the biased media throughout his campaign… until finally, HE got the last laugh. But back in 2015 when Republican primary campaigning began, the mainstream media didn’t even pretend to take seriously the possibility that Donald Trump could be the next president of the United States.

Lawrence O’Donnell (flashback): I have not yet included Donald Trump in our coverage of the Republican presidential campaign this season, and that is because he is obviously never going to be president. He is obviously never going to be the Republican nominee for president, and he is obviously never going to be a candidate for president.

Political Commentator (flashback): He will not be president. He will not be the nominee. He'll go through a few primaries, I think.

Political Commentator (flashback): This man has got some momentum and we better be ready for the fact that he might be leading the Republican ticket.

George Stephanopoulos (flashback): I know you don't believe that but I want to go on (others laughing).

News Anchor (present day): What once might have seemed like a joke is suddenly no laughing matter.

As an investor, you need to prepared for times when markets defy the odds and the analyst predictions and move in the opposite direction that most people expect. Remember all the warnings from all those highly respected voices on Wall Street and in the pages of the New York Times who told us that electing Donald Trump would be disastrous for the stock market? Well, right now stocks are riding high on a lot of high expectations, with few investors seeing the need to hedge themselves against downside risk.

Precious metals markets, meanwhile, are largely being overlooked and under-owned by investors. Despite gold prices rallying in the first three weeks of the year, the latest holdings report from the GLD gold ETF shows investor buying of shares at the lowest level since March of last year. These are the sorts of depressed sentiment conditions that often coincide with bargain prices and great buying opportunities.

Gold prices currently come in at $1,188 an ounce after declining 2.0% this week. Silver is down slightly less or 1.3% since last Friday’s close to trade at $16.96 per ounce. Getting hit the hardest this week is palladium, which now shows a weekly loss of 6.9% to come in at $737. Prior to this week palladium was up a whopping $130 over the previous four weeks so it was certainly due for a pullback. And finally, platinum is off 0.6% to trade at $976 an ounce as of this Friday morning recording.

Well now, without further delay, let’s get to this week’s featured interview between Money Metals president Stefan Gleason and Pete Fetig during a recent summit on all things precious metals.

Stefan Gleason

Pete Fetig: Stefan, I would like to start with what are precious metals and why should someone even own something like that?

Stefan Gleason: Thanks Pete. That is obviously the most fundamental question to this entire conversation. Is what are precious metals and why should you care? And this is something that has been driven out of the public consciousness to a great extent over the last 80 or 90 years and especially in the last 40 years. And that is that the role the precious metals play in our society and in our monetary system and as an investment. First and foremost, I would say that people should understand gold and silver is money. It is true money. It is been chosen throughout time as a medium of exchange, a store of value, and has been used in trade ever since several thousand years B.C. So gold and silver is first and foremost money. It has been chosen as money for a lot of reasons and those reasons are still in existence today.

First of all, it is tangible. It’s an actual asset. It cannot be created from nothing. Like paper money today is created from nothing or even electronic equivalent of paper money. It is private. It is something that you can exchange between people and it is not tracked or traced. Like so many things are in our electronic monetary system today. It is highly liquid. It is accepted by all people or governments at least. Certainly, private individuals understand that it has value. Always going to have value. It has always been accepted. Ultimately, even central bankers view it as that. Even though, they have waged a war against gold and silver and gold and silver ownership, particularly in the last several decades, they hold it as a reserve asset. They understand that it is the ultimate form of payment. It’s a form of payment that has no counterparty risk. It is not also someone else's liability at the same time, like the dollar is. And so central banks, while they do not talk about it, are holding gold and silver as reserve assets because they know that it has timeless value.

More immediately gold and silver are precious metals that are really a form of financial insurance. It’s a non-correlating asset. It does not move necessarily with the stock market, the bond market, the real estate market. It’s something that you should have as a part of your asset allocation because when everything else falls apart, gold and silver typically does very well. Just like an insurance policy that you do not necessarily want to have to cash in. You still have it. You have an insurance policy in your house. You probably have one on your car. You should have an insurance policy against your financial asset. Gold and silver is that insurance policy. It is also of an excellent hedge against inflation. It is really the ultimate hedge against inflation.

That is today, in the last 40 years in particular, since the United States and really the whole world, went off the gold standard. You’ve had an explosion in debt. You’ve had an explosion in the creation of fiat money. We now have really a competition going around the world to devalue fiat money. It’s a race to the bottom. That is done with the creation of new debt and the printing of new money to sort of prop up the economy, prop up the bond market, the stock market. And as result of that, as a result of more paper money and electronic money being created, it has caused data reduction in the purchasing power of these other currencies. Gold and silver have maintained and even increased their purchasing power, over time.

Since the Federal Reserve System in the United States was created a little over 100 years ago, the US dollar has lost over 97% of its purchasing power. In the 100 years prior to that, except for a short period of time during the Civil War when they went off the gold standard, the purchasing power of the dollar was relatively the same, but then declined dramatically since the Federal Reserve system was created. So you have this massive devaluation of currencies happening all across the globe, and gold and silver are tangible assets that are a hedge against that, that benefit from really the devaluation as they rise in price. We have seen that, gold and silver, have reached all-time highs in recent years. They got a little overheated and pulled back in dollar terms since 2011, but at the end of the day you want to own a certain amount of gold and silver as a hedge against inflation and financial turmoil.

Ultimately, if you think that governments are going to live within their means, and if you think that they are going to respect property and not go into huge amounts of debt, then maybe you do not want to own that much gold and silver, but I don’t really see a change in that policy. No matter who is in power. We seem to be heading down this sort of unstoppable, this road with no turns if you will, towards larger amounts of debt, more inflation. Ultimately, that is all going to benefit gold and silver. I personally believe that it is downright dangerous not to have some of your money in gold and silver. I am talking about the physical metal, not necessarily mining stock, or paper alternatives that are supposedly back. I am talking about having the physical metal with no counterparty risk. Gold is money. It’s insurance. It’s always trusted and accepted and everybody should own at least some.

Pete Fetig: Well that’s an excellent answer and very astute observations. Appreciate that very much. In your estimation, which precious metals are best to invest in and why?

Stefan Gleason: Gold and silver are the primary precious metals. There is also platinum and palladium. Gold and silver are really the ones you want to focus on. In particular, I would urge people to look at silver. Gold has always been considered money as has silver. Silver has in recent years been demonetized more than gold. But that is reasserting itself. Silver is currently historically at an extremely cheap level when priced against gold. In the last 200/300 years, the gold/silver ratio is averaged in the 30 range, 30 to 1. Meaning 30 ounces of silver to 1 ounce of gold. But prior to the Federal Reserve system, it was generally in the 15, 16, 17 to 1 range. It fluctuated a little bit when those huge silver discoveries in the late 1800s, but the bottom line is that the gold/silver ratio is way out of whack. Silver is way undervalued versus gold.

So as of right now, I would say that the first precious metals investment somebody should buy or the first metal they should buy, would be silver. I am not saying to buy just silver, but I would emphasize silver over gold. Probably have 60, 70% of your money in precious metals in silver, in physical silver. Now gold is less volatile when priced in dollars. But for a number of reasons, including the ratio being where it is today, silver is definitely the one that has the most potential, as things unfold. I think they are both going to go way up when priced in dollars continue to go way up, but silver should outperform gold by at least a multiple of 2, possibly 3 or even 4. We could see at the end of this bull market that we’ve been, although we are in a 4-year correction within that secular bull market, but we could see silver get down to 10 to 1. It is quite possible. And the reason for that is not because of this ratio, although that is certainly an important data point.

But silver has some amazing qualities that come into play in the supply-demand picture. It is not a monetary metal. For that part, it is being remonetized. It is being invested in at a much higher rate, when it comes to new dollars coming into gold and silver. A lot of it’s going into silver. The silver market is much, much smaller. There is less silver available above ground. There is fewer ounces of silver above ground on the earth then there is gold. There’s about a billion. We do not know exactly, but somewhere in the neighborhood of 1 billion ounces of silver available in pure form above ground up. There is 4 to 5 billion ounces of gold. If you think about it, silver is more rare, at least above ground, than gold. Which is remarkable. Gold is hoarded, it is kept and it almost never gets consumed. Silver, particularly in the last several decades when it has been demonetized by governments, it has been consumed and sold off and a lot of it is unrecoverable.

When I talk about consumption, I am talking about things like, particularly in recent years, electronics, medicine, solar technology. Photography has given way to digital photography, so that one aspect of silver demand has diminished. It has been more than made up by an exploding demand from the standpoint of high technology, micro technology, solar, medical use, medical devices. And the reason is silver has qualities that are unique in many respects. It’s one of the best conductors of heat. It’s the best reflector of light. It’s the best conductor of electricity. It is also the best natural biocide. It kills something like 400 viruses and bacteria. That is why medical devices and hospitals and so forth are using silver, nano-silver technology, to kill bacteria and to clean things. There’s all kinds of sprays and mists. Silver has an amazing supply-demand picture. You have both increasing industrial use and then a significant re-monetization of silver as an investment asset, happening at the same time. Meanwhile, mining supply is falling and we probably reached peak silver production last year. So you have a perfect storm coming together in silver. Anyway, both are great. You should have both. If you are going to invest in one versus the other, I would favor silver.

Pete Fetig: That is very, very interesting. What is the biggest mistake that people make when investing in precious metals?

Stefan Gleason: Well this is a really important question because we have talked about the importance of owning gold and silver. We’ve talked about silver being possibly advantageous, probably advantageous to own over gold, and that message is getting out. People are starting to look at gold and silver seriously again. Like they did decades ago. And you’re seeing a lot of promotion of gold and silver in recent years. It is still very under owned. Probably 1% of the American people own any physical gold or silver, unless you count jewelry, which is also very small use of it, of gold and silver compared to the monetary demand in the U.S. or the potential monetary demand. There is a lot of advertising out there. You see TV ads. You hear radio ads. Stuff on the Internet.

Unfortunately, and this is what is really, really upsetting to me as somebody who is not just an investor, but somebody who obviously owns a precious metals company and is concerned about people not being taken for a ride. So say you’ve figured out, "I need to own gold and silver." You figure out the reasons to own it. That is great. I mean 98, 99% of the American people have not figured that out yet. They will figure it out. I think there is going to be many multiples of the current population in gold and silver as an investment in the coming years. But say you are on the cutting edge and you’ve figured out that you need gold and silver. Then the first opportunity you are given to buy gold and silver might be one of these TV type promoters. They talk about the merits of gold and silver, which of course they are right. Unfortunately, many of these companies are doing what we call a bait and switch. They take those folks who have figured out they want to own gold and silver, but do not know much about the market. And then they try to switch them or sell them on rare or numismatic coins.

First of all, let me say at the outset. Rare coins, they do exist. There is value. It can be a fun hobby. And it’s a big hobby. However, so much of what is being sold as rare or valuable is not. In many cases, it’s an outright rip off. Where you are being asked to pay many multiples of the melt value of the metal for a supposedly rare or proof coin or commemorative coin. And unless you are a real expert, you really should not be involved in that market. You should keep it very simple. Don’t buy anything that cost very much over the actual melt value of the gold and silver that is in it. And that’s called bullion or bullion coins, bullion bars. Stuff that you know exactly how much it’s worth. If you have access to the Internet or the newspaper, you know at any given time how much an ounce of gold is worth, how much an ounce of silver is worth. And that’s what you want to be buying. It is much more liquid.

By comparison, these rare coins are sold with a huge bid-ask spread. Meaning, you might pay ... Say if gold is roughly a little over $1,200 an ounce. Say you pay $2,500 for a supposedly rare St. Gaudens coin, which has a little bit less than an ounce of gold in it. First of all, you are probably paying way too much for that. It may not be worth very much more at all than its actual melt value. When you sell it back, you are probably going to take a 30%, may be even a 40 or 50%, haircut on that premium that you paid above the spot price. You might only get $1,500 back for it. And in some cases, you might only get what it is actually worth in terms of melt value. People are sold on rare coins and commemorative and proof coins, as though there’s some additional value there. In some cases, there are, but most people are not knowledgeable enough to know the very details of all these different sub-markets. Is a 1923 that is a mint state 69, how much is that worth versus a mint state 68 or a mint state 67? There are these different grades. It’s a very different situation. You are buying artwork, when you are buying rare coins. You’re buying a painting. You’re buying a collectible. You’re not buying something that it’s based on its actual melt value.

Unfortunately, a lot of folks are being pushed and pressured into buying the so-called rare coins. They often will try to talk you out of buying bullion coins, rounds and bars because the profit margins are so small in comparison. That does not serve the investor very well at all. In fact, we have had to pick up the pieces when people come to us and find out they bought some of these things and they find out they’re really not worth that much. Much more than their actual melt value. It’s really a sad situation.

On top of that, because there is so much money involved in profits for the company selling these, you have commission salespeople that are very aggressive. They may call you repeatedly. Pressure you. We don’t take that approach at Money Metals Exchange. Obviously, we don’t even sell the stuff that they are selling. We sell actual bullion coins, rounds, and bars. The tactics are also off-putting. Unfortunately, it is has given the precious metals dealer out there a bad name. There is a lot of good dealers, but there are a lot of them that are involved in this. And we think it is wrong. In fact, we founded Money Metals Exchange specifically in reaction to the practices of those kinds of companies. I was involved in publishing and we had lots of precious metals customers or people that were interested in precious metals. The only people that could advertise, afford to advertise were a rare coin dealers, and we were not interested in that because we have heard the stories. We didn’t want our people doing that. So I ultimately launched the precious metals business as an additional offering and focused again on the actual melt value. The biggest mistake people make is buying rare coins or proof coins or commemorative coins and not bullion. Stuff that is actually valued at its market price.

Pete Fetig: Well let’s say that someone is ready to buy some gold and silver. They know that they should be avoiding any type of numismatic or proof points. What denominations, sizes or weights, of those precious metal are best to own and hold?

Stefan Gleason: Well, first of all, if you have made the decision not to buy proof, rare, or commemorative coins, unless you are a true collector and an expert and have the time to learn. You’ve made the best decision that you can make. The following decision on exactly what the denomination, weight, or size is somewhat inconsequential in comparison. But, obviously, there are different products, there are different choices. One ounce is the most popular size generally of both gold and silver. I think that is probably a good place to start. If you are looking at gold and silver as emergency or crisis type hedge, which is part of the reason I own it, and you might even worry about the potential for having to use gold and silver as a currency or as in barter or so forth. Well, in that situation, you want to have some fractional gold and particularly silver, which is a nice, small increment way of owning it. It’s a little higher in premium. Not much higher, but it is higher. You do not necessarily want to put all your money into small fractional in half ounce, quarter ounce, tenth ounce, type stuff. But it’s nice to own some of that. I would say that 1 ounce is probably the best place to start. Then to get a little bit of fractional silver on top of that. From there, we can talk about coins and bars.

Pete Fetig: Is there any reason why an investor might consider a foreign origin coin or bullion, versus an American coin or bullion? And what about privately minted rounds or bars versus coins?

Stefan Gleason: Foreign coins, the most well-known probably in the modern era, anyways, is the Krugerrand. That’s an alloy, there is a little bit of copper in it. I think it is about 92% gold and 8% copper. It has got a full ounce of gold. That is a very popular way of owning gold. It also tends to be a little less expensive than an American Eagle. Again, if I sold you on the idea that you should be looking at the melt value of the metal, then the next question would be, "Why do you want to pay huge amount of premium above the melt value?" Maybe you should focus on the things that have the lowest premium as a percentage above the melt value. And you’re not going to be able to buy gold at the melt value in most cases, unless you have a special situation. There is minting cost. Wholesaler has a small amount of gross profit. A dealer, obviously they can’t run their business if they do not make a little small profit. You have, again, the minting and fabrication cost. So the range in gold on premiums is low as maybe 3% over gold for a gold bar to 7 or 8% for a gold coin. But again, we’re talking about just a few percentage points.

Some people like the Krugerrand. They like the Australian Kangaroo or the Austrian Gold Philharmonic. These are all great coins to own. In fact, all three of those are less expensive per ounce, slightly less expensive than the Gold Eagle typically is or the Gold Buffalo. On the other hand, some people want to focus on U.S. coins because perhaps they are more recognizable one and they might get a slightly higher premium or price when they sell them back. So a lot of it is personal preference I would say. As long as you are making sure that you are buying bullion coins, bars, and rounds, as opposed to rare or numismatic coins and you are paying attention to what the melt value is. You’re probably not going to go wrong with what specific item you buy.

The other thing I mentioned silver rounds and silver bars. Silver rounds are privately minted coins, so to speak. They’re not technically coins because they are not legal tender and they are not guaranteed by governments, but they are less expensive. And that is particularly helpful in silver. A silver round might only be a $1 over spot. A Silver Eagle might be $3 over spot. That is 10% more, if you look at the price of silver. Obviously, it depends from dealer to dealer, but generally silver rounds are a cheaper way to buy practically silver. And bars, are also, a lower-priced way to buy gold and silver. These are again not legal tender, but they are privately minted. They’re usually assayed and guaranteed. There are some very common well-known bars out there. That is for somebody who is putting some real money, a significant amount of money, into gold and silver. We generally would urge people to buy bars, 1-ounce gold bars, 10-ounce gold bars, 10-ounce silver bars, 100-ounce silver bars, kilo bars – which is 32.15 ounces. That is a great way, a low cost way of buying precious metals. Again, the most important decision was making sure that you are buying bullion and not rare coins.

Mike Gleason: You’ve just heard the first half of Stefan’s interview with Pete Fetig during the recent 360 Gold Summit, I hope you enjoyed it. And we want to wish everyone a great Independence Day holiday weekend. And remember, without liberty there is no freedom. So let’s all band together and keep fighting for it

You’ve just heard the first half of Stefan’s interview with Pete Fetig during the recent 360 Gold Summit, I hope you enjoyed it.

Well that will do it for this week, please check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

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