The Michael Fuljenz Metals Market Report: December 2012, Week 1 Edition

Gold Fields: South African Gold Industry on Verge of Collapse

Gold Fields, the world's fourth largest gold bullion producer, warned this week that South Africa's gold mining industry is on the brink of collapse unless steps are taken to boost productivity. Wildcat strikes have crippled the mining in industry in South Africa, the continent's largest economy and once the world's biggest gold producer. "If the last five years' decline in production continues, there will be no industry in five years' time," said Gold Fields' Chief Financial Officer Paul Schmidt. The strikes have compounded the burdens of rising labor costs and steep tariffs on electricity. "We have gotten closer to the precipice. There is a need to do things differently. We cannot continue to do what we have been doing for 10 years," said Gold Fields CEO Nick Holland. The company lost around 145,000 ounces of gold production during the strike at its KDC and Beatrix mines in South Africa in the second half of this year, resulting in a loss of revenue of 2.1 billion rand ($234.91 million). The company is looking at shutting down marginal shafts, resulting in job losses. "We are reviewing every dollar we spend," Holland said. "The problem we have today is that the industry is at a $1,750 gold price and the overall margins after capital aren't much better than what they were when gold was at half that price."

Three More Bullish Factors for Gold at Year's End -
Central Bank Easing, ETF Demand and Central Bank Gold Buying

Currently, the U.S. Federal Reserve and the Bank of Japan are continually inflating their currencies in a variety of ways, with plans to keep interest rates super-low for years to come. Meanwhile, the European Central Bank (ECB) is starting to ease more than ever before. For decades, the Germans (who controlled the ECB in past years) were very fearful of inflation, due to their history of postwar hyper-inflation in 1923 and 1946, but the head of the ECB is now an Italian, Mario Monti, who has more expansive ideas. As Ian McAvity jokes, "Europe has it backwards: The ECB is run by an Italian and the Pope is German."

Global easing should help to push gold up in terms of most major currencies as the major central banks of the developed world continue their "race to the bottom" by inflating all of their currencies in tandem. A lower currency tends to give the nation with the weak currency a trading advantage (making their exports cheaper), so competing nations retaliate by weakening their own currency in a kind of "paper" trade war. Another bullish factor for gold is the popularity of gold exchange traded funds (ETFs). These funds must hold an amount of bullion in storage equal to the shares sold, so they must keep buying gold to meet demand. This creates a "virtuous circle" for gold investors, pushing gold up and attracting more investors.

In Barron's ETF Focus ("The Real Gold Rush," December 3, 2012), columnist Brandan Conway writes: "Investors have fed nearly $8 billion into the most popular gold exchange-traded funds this year. Gold ETFs now hold an all-time high of more than 83 million ounces, according to ETF Securities. The four largest gold funds, which account for nearly 99% of assets in gold ETFs now have more than $90 billion" in gold, led by the $76 billion SPDR Gold Trust (GLD) and the $12 billion iShares Gold Trust (IAU). Conway continues by identifying a "stealth catalyst" for gold, the purchase of significant new amounts of gold by emerging market central banks. "China is just one country that could ramp up its gold purchase as it seeks to diversify its central bank reserve holdings, especially if the yuan is to be a global currency. China's gold stock is estimated at less than 2% of its total reserves; a surge in Chinese gold imports has sparked talk of an unofficial binge." Conway also likes the fact that gold has enjoyed a stable 12-year rise while never entering into a panic buying "bubble" stage, avoiding any overly-rapid rise, as in 1979-80.

In short, gold is on track for its 12th straight rising year and is poised for even stronger gains in 2013.

The Danger of Indians Owning Gold in America

The downside for Indians owning gold in America is that they are being targeted for robberies, based on the assumption that Indians like to wear their gold jewelry around Diwali season (November this year). Sophisticated robbers know that wealthy Indians wear or store a lot of gold during their festival of lights. In a recent two week period, five homes in the Irving (Texas) Valley Ranch area were robbed of their high-quality gold jewelry. Four of those five households were Indian, and all of the burglaries took place in the weeks leading up to Diwali, the five day festival of lights - a time when many Indian women dress up in their fine gold jewelry. Robbers know that there is a greater likelihood that their jewelry is at home rather than in a safety deposit box. This is not a new trend. Police say it happens about every other year. Be careful.

Putting Your Children And Grandchildren Through College With Rare Coins - A True Story

College tuition costs at the best schools are astronomical. Even four years at a state university will set you back a pretty penny. If you have young children, by the time they're ready for college, the costs will be beyond astronomical.

People have different strategies for building a college education nest egg for their kids. But a friend of mine - I'll call him "Mr. B" - hit on an inventive and very profitable way to build a college fund for his youngsters. Mr. B is a prominent fellow numismatist and coin dealer who has held numerous influential positions in national coin industry groups. I was impressed with his creative college savings plan, and I think his story is worth sharing with you.

Mr. B's first two children, a girl and a boy, were born in the late 60s and early 70s. Mr. B launched his plan right away to be ready financially for their higher education.

Every year he bought $1,000 of well-known companies' stocks for each kid. He stuck to the axiom of "invest in what you know" and bought companies that affected his children's lives, like Johnson & Johnson (because they make baby powder and no-tears shampoo). As they grew out of the toddler stage, he bought companies like toymaker Mattel and, of course, Disney. When they were teens, he bought consumer product companies like Coca-Cola.

Now, here's the unusual part of Mr. B's strategy. In addition to building a stock portfolio for each child every year, he also invested $1,000 in high-quality U.S. gold and silver coins for each of them.

He chose only gem uncirculated or proof coins that were 50 to 150 years old. He completed a U.S. gold coin type set for each child. He also enhanced their coin portfolios with many gem-quality silver coins.

Mr. B told me that his plan of investing in stocks and coins became much more than just a prudent financial exercise. "It was a bonding experience," he said. "It brought us closer together as a family while instilling in my children valuable life skills." The kids got excited when annual reports came out, which Mr. B read with them, so they could see how the companies they owned were doing. They followed the stock charts of their portfolios and even went to shareholder meetings. The kids became absorbed in the history of the coins in their portfolios and avidly dug into reading and learning about them - which paid extra dividends later on when they got outstanding grades in college history courses.

Mr. B was able to finance the two children's educations by selling the stock and coin portfolios. Adding it all up, he noted that the money he invested in coins paid off far better than the money he put into stocks.

Here's how the actual performance numbers worked out. Investing $1,000 in stocks and $1,000 in high quality gold and silver coins for each child each year for 18 years yielded these results:

First Child:

• 18-year $18,000 investment in stocks: $40,500 profit, 225% growth
• 18-year $18,000 investment in high quality U.S. coins: $68,000 profit, 377% growth

Second Child:

• 18-year $18,000 investment in stocks: $38,000 profit, 211% growth
• 18-year $18,000 investment in high quality U.S. coins: $77,500 profit, 430% growth

Aggregate:

• Stocks: Original investment $36,000 ($18,000 x 2), $78,500 profit, 218% growth
• Coins: Original investment $36,000 ($18,000 x 2), $145,500 profit, 404% growth

Many people put cash away in CDs or money market accounts in anticipation of their children's college days. But the meager interest being paid on these accounts against the rapid debasing of the U.S. dollar - and pretty much all world currencies - sucks purchasing power out of the nest egg rather than growing its value. Mr. B's college coin savings plan, on the other hand, paid off with handsome growth.

Investing for Your Children and Grandchildren

We offer parents and grandparents of future college students the opportunity to invest regularly in high-quality mint-state rare gold coins through a strategy developed by America's Gold Expert and Award-Winning rare coin expert, Mike Fuljenz. Through an accumulation plan that we personally outline according to your circumstances and needs, our strategy could provide you with a systematic, smart long-term way to build the resources you need to send the children you love to college.

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