Gold up as Britain bolts EU

The vote June 23 in Great Britain calling for that nation to leave the European Union is triggering, and will continue to trigger, dramatic global financial changes.

Even people of such widely diverse backgrounds and orientations as globalist hedge fund billionaire George Soros, former Federal Reserve Chair Alan Greenspan and commodities guru Jim Rogers are predicting close to a financial Armageddon as a result of this vote.

A news report June 27 stated that publicly held company shares worldwide declined more than $2 trillion in value in a single day June 24. There is now talk in as many as eight of the member nations of the European Union, including France and Italy, to have their own referendums on whether to exit the EU. The value of the British pound and the euro fell, the pound to its lowest level since 1985.

I have long suggested owning physical gold and silver as a form of wealth insurance. They are meant to counter some of the losses at times when the values of paper assets go down. On June 24 they performed superbly. At one point that day, the price of gold was up more than 20 percent against the British pound.

The strength in gold and silver prices was even more impressive when you consider that more than 50,000 COMEX gold contracts (representing over 5 million ounces) were added to open positions June 24 – almost a 10 percent increase. These massive short sales restrained the price increase but did not halt it from one of the largest one-day increases over the past few years.

By the way, the price of gold June 24 jumped so high in the London and New York paper gold markets that the price on the Shanghai Gold Exchange (which trades contracts for immediate delivery of the underlying physical gold) fell from a premium to a discount from the other venues!

In times of uncertainly, political, economic, financial, or otherwise, paper asset values can be at great risk of loss of value. What will happen to stock, bond and currency values going forward? I’m not an expert at that for short-term moves, other than warning that prices could be extremely volatile.

Having said that, though, I expect that the British pound and the euro will both eventually fail as currencies. The average life of fiat (paper) money is about 40 years. With both the British and European Union governments piling up debt and increasing the paper money supply at unsustainable levels, I don’t see any prospect for either currency to avoid this fate.

So, what is likely to happen to the precious metals and numismatic markets as a result of the British vote?

When people finally realize that there are massive looming financial crises worldwide that have nothing to do with whether Great Britain ultimately leaves the European Union, I expect the value of paper assets will become even shakier than they are right now. In that respect, I expect and even greater flight to the relative safety of gold and silver. As demand for physical metals grows, especially with supplies already tight, prices are bound to go much higher.

A few weeks ago, I projected a 2/3rds probability that gold would exceed $1,450 and silver $20 by Labor Day. Right now that target is a lot closer than at the time I issued the prediction.

I don’t have the same hopes for numismatic demand. Purchases of rare coins and paper money tend to be discretionary. In times of financial uncertainty, consumers tend to curtail such expenditures to avoid suddenly running out of the ability to pay for life’s necessities.

Even if there is an overall slowdown in demand for numismatic items, as I think likely, the impact will not be the same across the spectrum. I think gold, silver, platinum and palladium coins, where their worth is more than 50 percent dependent on intrinsic metal value, will tend to hold in price or even increase. At the other extreme, categories such as paper money and coins where the metal content is not a factor in overall value are most at risk of falling prices that result from sagging demand and increased liquidation.

There are other factors that will affect numismatic prices. Issues that have seen recent significant price increases will be more at risk of that trend reversing. Coins and paper money from nations that are especially hard hit economically will likely see lesser demand. Specimens coming from countries with rising prosperity just might hold steady or rise in price. Modern numismatic releases will tend to attract less demand unless they are sold closer in price to their metal content.

Toward the end of 2008, when gold and silver prices fell dramatically, demand for bullion-priced coins and bars soared. As delivery times stretched out into the future, some would-be buyers who didn’t want to wait started purchasing common-date circulated U.S. $10 eagles and $20 double eagles. This surge in demand started to push up premiums for such coins. This pattern could repeat.

A reflection on the passing of Chet Krause

Chet Krause had a tremendous influence over numismatics, especially with his founding of Krause Publications. He also had an impressive collection of Wisconsin obsolete notes. A few years ago, I was fortunate to talk with him at one of the last coin shows he ever attended. I picked his brain about issues from Knapp, Stout & Co, a lumber company that was one of the largest businesses in the world around the 1880s. My great-great grandfather Heller had gone directly to Menomonie, Wis., after arriving from Prussia. He was soon employed by Knapp, Stout. When the company opened branch operations in Rice Lake, Wis., he was sent to be the first manager there.

Chet was able to give me the pedigree on the modest hoard of Knapp, Stout notes that had come onto the market some years earlier. While I respect and appreciate his extensive contributions to numismatics, he was especially kind to share with me this background. He will be missed.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com). His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).

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