The Michael Fuljenz Metals Market Report: November 2012, Week 4 Edition
Gold corrected last week but then it rose $20 Monday morning. Silver rose even more (2.2%) Monday morning to surpass $33 for the first time in a month, and platinum rose $19. Some of these gains are due to a weaker dollar, but gold's main engine now is fear of the fiscal cliff and global tensions in the Middle East - which have caused a surge in the price of crude oil. Gold was down last week because demand in India during its Diwali festival was weaker than expected, but silver rose last week and platinum has been stronger than gold in recent months, due to falling production in South Africa resulting from mine strikes. Major dealers across the country are reporting some very large gold coin orders today!
$2.50 Indian Demand Rising
Over the past few months we have observed a decrease in dealer inventories of $2.50 Indians, along with increased demand for better-date mint-state specimens graded by PCGS or NGC. This supply crunch is partly due to increased advertising for Indian gold coins on radio, on prominent websites and in print media. I expect prices to begin to rise for many of these $2.50 Indians, since availability is likely to be "spotty" for some key dates and grades. Major dealers across the country are reporting some very large gold coin orders today!
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Soros Boosts Gold ETF Holdings by Half
Billionaire fund manager George Soros boosted his stake in the SPDR Gold Trust ETF by 50% and tripled his holdings of Freeport-McMoran Copper & Gold, according to SEC filings. Fellow billionaire John Paulson maintained his position in GLD, the world's biggest gold bullion-backed ETF, but he cut back his stake in Gold Fields mining stock by about two-thirds from 18,038,600 shares to 6,541,600 shares.
Soros Fund Management raised its stake in GLD from 884,400 shares to 1.3 million shares. Soros also more than doubled its holdings in the Market Vectors Gold Miners ETF (GDX) from 1 million shares to 2,325,000 shares. Soros holdings in Freeport-McMoran went from 385,000 shares to 1,295,558 shares in the third quarter.
Gold Discoveries Getting More Scarce
The supply side of the gold supply/demand equation is getting squeezed because new gold discoveries are fewer and farther between. As older mines are worked out, there are fewer new mines to replace the lost supply.
Even with record spending on exploration - $8 billion last year - gold discovery rates are sliding, according to Jamie Sokalsky, chief executive officer of Barrick Gold Corp., the world's largest producer. There were only three new gold discoveries last year, compared with 11 in 1991. None of the three most recent ones could be described as "supergiants" holding more than 20 million ounces, Sokalsky said. He predicted gold's bull market shows no signs of weakening, but it won't help find more gold.
"I don't see a surge in gold production if we saw a gold price of $3,000," Sokalsky said. "At a higher gold price, we'd still be experiencing the same challenges. I'd suggest there'd be very limited response to that higher gold price."
"It's getting harder to find large deposits and to get those deposits into production takes at least twice as long as it might have taken a decade ago," Sokalsky said. "We're not going to see new mines coming in as fast as we thought to replace old mines that are closing."
"Getting mines permitted, dealing with the government and the communities, environmental issues, all of that takes so much longer," said Sokalsky. "It also costs multitudes more to build a mine and to finance that."
Global gold mine output may increase only 0.7% in 2013, the slowest pace since 2008, according to Barclays, which forecasts that total physical supply may actually shrink 0.4% next year.
Federal Deficits Soar While Washington Fiddles and Fumbles
Here's the sad evidence. During October, instead of solving the nation's mounting debt problems, the President and members of Congress were campaigning non-stop. In that month, federal deficits soared. Last Tuesday, the U.S. Treasury Department announced that the federal government's budget deficit hit $120 billion last month (a $1.44 trillion annual rate), larger than consensus estimates of $114 billion and far above the $99 billion reached in October of 2011. Federal outlays hit $304 billion in October, up from $262 billion in the same month in 2011, more than wiping out a significant increase in tax revenues.
| October | Federal Spending | Tax Revenues | Deficit | Annual Rate |
|---|---|---|---|---|
| 2011 | $262 billion | $163 billion | $99 billion | $1.19 trillion |
| 2012 | $304 billion | $184 billion | $120 billion | $1.44 trillion |
In addition, the Federal Reserve will use low inflation to justify the continuation of their monetary easing. Last Wednesday, the minutes from the latest Federal Open Market Committee (FOMC) meeting revealed that the Fed is now discussing extending "Operation Twist" into 2013, in addition to their QE-3 easing.
Whether or not Washington goes over the financial cliff or - more likely - they patch together a short-term fix and "kick the can down the road" for another three to six months, we will see more monetary inflation and possibly more trillion dollar annual budget deficits for "as far as the eye can see."
Recent Comments about Gold and Silver
Last weekend, November 16-17, there was a Hard Asset conference in San Francisco, with some of the same featured speakers that headlined another conference on October 24-27. Here are some comments from those top gold experts, some of whom appeared at both conferences.
Pamela Aden, co-editor of The Aden Forecast, said in New Orleans: "Silver has more potential than gold on a percentage basis now. This is an excellent time to buy gold or silver. For gold, any price under $1700 is an excellent buy." In San Francisco, she said that gold is even stronger in terms of other currencies than in the U.S. dollar this year, and if we see more tension in the Mideast, she sees $1900 gold by year's end.
Marc Faber, editor of the Gloom, Boom & Doom Report and a member of the Barron's Roundtable, recommends holding 25% in equities, 25% in cash and bonds, 25% real estate and 25% in gold.
Bill Murphy, chairman of the Gold Anti-Trust Action (GATA) Committee, said the physical supply of gold is so tight that we could see explosive $100+ daily moves in the future. That's because central banks don't have all the gold they claim to have. The government blocks attempts to audit its gold holdings.
Robert Prechter, editor of The Elliott Wave Theorist, said that "silver and stocks are correlated more closely than most investors understand," since "silver always falls when the economy contracts."
Bottom line, it is true that silver is more volatile than gold and it has risen and fallen faster than gold this year and over the last 5 or 10 years, but it could decline or rise less than gold during a global recession. Gold acts like a monetary metal while silver has a foot in both worlds, as a hybrid (industrial and monetary) metal.
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