The Michael Fuljenz Metals Market Report: April 2013, Week 4 Edition

Gold reached a low of $1321 last week, in active trading on the futures market in New York, but gold never fell below $1378 on the more stable London market, where prices are set only two times per day. Likewise, silver traded as low as $22 on the New York futures market, but it never fell below $23.30 in London. This is a measure of the added volatility in the futures market, where every ounce of silver or gold is traded dozens of times on paper before it is ever delivered to the final owner in bullion form.

Guns and Gold
142nd NRA Annual Meeting and Exhibits May 3-5

The 142nd NRA Annual Meeting and Exhibits, May 3-5, is being held at the George R. Brown Convention Center in Houston, Texas. This year's NRA show will feature over 550 exhibitors, covering more than 400,000 square feet of convention center space. Be sure to stop by booth #4616 to see us. One lucky visitor will win a Guns & Gold commemorative 1871 Colt revolver with a historic 1871-dated U.S. Quarter Eagle gold coin in the grip valued at over $5,000. See you at the show! Call your account representative for more details.

1991 $25 Gold Eagle Gem Uncirculated 2000 - 2013

For many years I have purchased low mintage Type I, Roman numeral, $25 American Gold Eagles for collectors, investors and placement in IRA's, three important demographics of demand. This week's graph shows how a portfolio of $10,000 worth of historic Gem Uncirculated 1991 $25 American Gold Eagles I purchased in 2000 would have increased in price over the years I have purchased them. This graph shows an increase from $10,000 to about $70,000 in the 12+ years since 2000.

Gold was $290 at the beginning of 2000 and was $1413 as of 4/23/13. This is an increase of 4.9X. While an impressive gain, it falls short of the 7X gain of the 1991 $25 Gold American Eagle that also held its value while gold was recently declining. This is a good example of why every portfolio should include some better-date gold coins.

As you can see, there are price dips along the way. That's why I recommend at least a 5-10 year hold period on rare coins. In the shorter time frames in this graph, price performance can lag for a few years, only to be followed by impressive gains. We all know that past performance of one coin does not guarantee future performance for all coins, but we can still learn many lessons from history.

Pardon Me, Mr. Paul Krugman, Your Slip is Showing...

New York Times economic columnist Paul Krugman is widely followed by the left. He is their economic champion. He won a Nobel Prize and has a best-selling book out. But his opinion pieces in the Times are often clouded with errors and partisan politics, even while he boldly accuses the other side of gross errors in the service of partisan politics. This was particularly true of his April 11 column, "Lust for Gold."

First, Krugman said that, "Historically, gold has been anything but a safe investment." To prove that outrageous point, he focused on the times when gold's price declined, without a long-term perspective to show that gold has far outperformed stocks, bonds, the U.S. dollar and most other investment categories, since gold was untethered from its government-imposed $35 anchor and allowed to trade freely in 1971.

He then said, "The modern world's closest equivalent to the classical gold standard is the euro, which puts European countries back under more or less the same constraints they faced when gold ruled." If that's the case, why has gold risen from $255 when the euro was launched in 1999 to over $1400 today? The euro was born at $1.18 in 1999. Now it is up about 10% to $1.30, while gold has risen by about 460%.

Krugman also maligns gold as just "a decorative metal" with little practical value. He ignores the role that gold has served for over 4,000 years of recorded history. Aristotle listed the virtues of gold as money over 2300 years ago. Gold has formed the financial bedrock of our nation during most of its wars, when paper money values often deteriorated rapidly, such as with the Continental currency in the Revolutionary War, Lincoln's Greenbacks in the Civil War, and rapid postwar inflation in the 20th Century after World Wars I and II and the Vietnam era of "stagflation." If gold has no "inherent value," isn't that more true of paper?

The problem with Mr. Krugman and his hero, President Obama, is that instead of acting like a good mediator, they often try to ridicule the opposition but rarely criticize their own support base. They claim to be "right," "honorable" and "reasonable," which automatically brands the other side as "wrong," "dishonorable" and "unreasonable." Whether the subject is gold, gun control or entitlement spending, both sides seldom make a serious effort to consider opposing positions, or view the other side as honorable, so any attempt at a compromise is often doomed from the beginning. Shame on you, Mr. Krugman. You helped to polarize the nation once again.

While U.S. Paper Gold Investors Seem "Baffled," the Rest of the World is Buying!

The weekend Wall Street Journal and Barron's offered two more gold articles which seem to reflect the conflicted view of the American press on the subject of gold. Bear in mind that gold seems like a strange investment cult to most U.S. journalists, who call gold investors gold "bugs." (Are there "bond bugs?") The clueless New York Times economics columnist Paul Krugman wrote a column on April 11, called "Lust for Gold," in which he lampooned "gold buggism" as an irrational love affair with an inert metal.

Krugman is wrong. Most Americans don't understand gold. Not one in 10 Americans owns an ounce or more of investment-grade gold or gold coins. Consult your neighbors to verify this fact. Most of the rest of the world understands gold, but Americans are only beginning to be exposed to gold as an investment.

The Saturday (April 20) Journal article ("The Great Gold Divide: Which Side are You On?" by Brett Arends) bears this out. He points out that gold still remains far above its inflation-adjusted pre-1971 price of $35, or even the $180 per ounce price, when gold was legalized for Americans on December 30, 1974.

There is no way to value gold rationally, says Arends. An "inflation adjusted" price suggests a lower valuation at $800 per ounce, while gold would need to be 10 times higher, $8,000 per ounce, to begin to back U.S. currency in circulation, much less the massive volume of derivatives built on that cash hoard.

In reality, a return to the gold standard is unlikely, but the world is slowly adopting the next best thing - central banks buying gold to replace paper, and private citizens buying gold to discipline governments.

A Division between "Paper Gold" and "Real Gold" is Finally Emerging

The 10-year gold bull market of 2001-11 was fueled by many factors - the decline of the dollar, massive new amounts of government over-spending in Europe and America, new central bank buying vs. no net gain in annual gold mining supplies - but the wild card that pushed gold up faster and farther than anyone expected was the launch of gold exchange-traded funds (ETFs) a decade ago. ETFs must buy the physical metal to back up their paper-traded shares, so ETFs created a "virtual circle" by adding a new layer of demand to push gold's price up. That rise, in turn, attracted more stock-oriented investors to gold ETFs.

The sudden decline of gold prices recently was launched by a "bear raid" on the futures market. Then, the gold ETFs quickly followed suit: Paper-gold investors bailed out right and left. Meanwhile, the physical gold market flourished. This division between paper gold and real gold was profiled in two separate Wall Street Journal articles published last Thursday: "Gold ETFs Hang Tough in Tumult" (by Chris Dietrich in New York) and "Gold Buyers Jump as Prices Plummet" (by five Journal reporters in Australia and Asia).

The first article told of the mass exodus from the biggest gold ETF, SPDR Gold Trust, from April 12-16. First, investors took out over $1 billion out of the SPDR ETF on Friday, April 12, "and $188 million on Monday, according to research firm Index Universe. That heavy selling likely accelerated the decline in gold prices, traders said. Investors continued to pull out of the ETF on Tuesday, with outflows of $563 million." That's over $1.75 billion (1.25 million ounces, or 39 tons) of "paper gold" sold in three days.

The second Journal article profiled soaring sales in the rest of the world, featuring a picture of crowded buyers at a jewelry shop in Bangkok, as "gold shops from Tokyo to Dubai have witnessed frantic buying of [gold] coins, alongside other items such as gold wedding bracelets. The surge has been triggered by cheaper prices." The Perth Mint said "There has been huge retail demand. The phones have been ringing off the hook." The article also cites unprecedented physical demand at the U.S. Mint, which sold 147,000 gold ounces in April (through April 17), vs. 20,000 ounces in all of April last year. The article continues: "The demand is causing supply shortages. Traders in Singapore said the wait is as long as seven weeks for fresh deliveries of the U.S. and Canadian minted coins. In India, gold imports are likely to rise to about 900 metric tons this year to meet rising demand that is coinciding with the peak marriage season."

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