The Michael Fuljenz Metals Market Report: May 2013, Week 1 Edition

Gold rose slightly (+$7) last week, and the other metals followed suit. Physical demand continues to be strong, despite a wave of bearish comments on "paper gold" (ETFs and futures contracts) on Wall Street. There is new tension in the Middle East after Syria said that Israeli missiles hit three facilities on Sunday. The Chinese are also buying strongly on the Shanghai Gold Exchange. The latest trading range for gold is $1450 to $1485, but that is about 10% above gold's overnight low of $1321 on April 15-16, 2013.

The Fed's Latest Meeting Indicates Continued "Quantitative Easing" for Years to Come

The Federal Open Market Committee (FOMC) meets about once every six weeks. Their most recent meeting concluded last Wednesday, when the FOMC said that the U.S. economy has "started to look sluggish in recent weeks." This negative assessment of the economy indicates that the Fed will continue with its promised $85 billion per month in quantitative easing (QE), at least until the unemployment rate falls to 6.5%. They have also pledged to keep short-term interest rates near zero until at least mid-2015.

It's a little-known fact, but the Federal Reserve is actually expanding its balance sheet by more than their promised $85 billion of proposed quantitative easing. In fact, they have added more than $90 billion in three of the first four months of the year, averaging about $91 billion per month so far in early 2013:

At current rates, the Fed is adding $1.09 trillion per year in new liquidity. Many pundits say that the Fed can do this with impunity, since "there is no inflation," but they are looking only at the Consumer Price Index. When this much money is created, prices rise somewhere. Recently, the stock market is sopping up a lot of that cash, with the Dow and S&P 500 reaching new record highs last Friday. Real estate prices are also rising again - by 9.3% over the last 12 months, according to the latest Case-Shiller price index.

Meanwhile, the G-7 finance ministers and central bank governors are planning to meet next Friday in London. Leading up to that conference, the accommodating French have challenged the austerity-minded Germans for control of the monetary future of the European Union. Mario Draghi, the Italian head of the European Central Bank (ECB), favors easing. Last week, he announced that the ECB cut short-term euro rates by 0.25% to 0.5%, saying that the ECB's monetary policy will be "extraordinarily accommodative."

Since the financial crisis of late 2008, the three major central banks - the Federal Reserve, the ECB and the bank of Japan - have added an unprecedented amount of money to the global financial system, while almost doubling the total of sovereign debt to more than $23 trillion, according to a Bank of America study. Their actions are telling us that "the crisis never ended, so we must keep pumping out money as if the world is in a perpetual state of need for more fiat money." Despite gold's recent correction, the price of gold is still double what it was ($730) during the 2008 financial crisis, when Obama was first elected.

Buffett Bashes Gold - But So What? He Was Against Gold at $35 an Ounce!

On Thursday, May 2, billionaire investor Warren Buffett said he would not even buy gold if it fell to $800. This just shows his bias and his blinders. He admittedly says he can only study investments that throw off "earnings" based on predictable cash flow and a successful business model, so he is basically admitting that he doesn't invest in gold because he doesn't understand it. He says the same thing about tech stocks: If he doesn't understand the underlying technology, he simply doesn't buy the stock. OK!

Buffett admits that gold has "never interested me," even when it was at $35. Last Thursday, in his Berkshire Hathaway board meeting, he said that "if it went to $800, I wouldn't be a buyer. It just sits there, and you hope somebody pays you more for it." (However, Mr. Buffett once invested in silver!)

Buffett is merely expressing the voice of the majority of Wall Street analysts, who understandably prefer to market their own stocks and bonds. Of the 38 analysts regularly surveyed by Bloomberg about gold, the majority voted that gold's 12-year winning streak is over! They probably have been wrong each year for the past twelve years!

April outflows of gold from exchange-traded funds (ETFs) hit a record monthly high of 176 metric tons. This trend is continuing in May. Barclays says that gold ETF outflows reached 17 metric tons in the first three days of May, taking the net gold sales for the year to date to 353 tons, which represents about 13% of the gold ETF peak holdings of 2,767 tons at the start of 2013, according to Barclays Bank.

Meanwhile, Physical Gold Demand Keeps Soaring

Meanwhile, Barclays Bank also says that May gold coin sales by the U.S. Mint have already reached 10,000 ounces, on top of 209,500 ounces in April - the best sales month since December of 2009. Year-to-date, U.S. Mint gold coin sales are already 512,000 ounces. Overseas, the demand is even more dramatic. The U.K. Mint said demand more than tripled in April. The Perth Mint in Australia said they had to stay open last weekend to meet orders that hit a five-year high. Physical flows into India, still the world's #1 consumer, exceeded five times the average of the past 12 months, according to the Swiss banker, UBS.

There may be some connection between the sale of paper gold and the purchase of real gold. Phil Streible, senior commodities broker at RJO Futures, said "People are liquidating those ETFs and they're utilizing their money to buy the physical." Speaking from the floor of the Chicago Mercantile Exchange, he said, "You're seeing a real disconnect...physical prices are holding strong" even as traders sell "paper gold."

Part of the reason cited for gold's decline in mid-April was the rumor that central banks (notably the Bank of Cyprus) would sell gold to raise cash, but it didn't happen. Instead, central banks are on a pace to beat last year's 48-year record of 534.6 tons of central bank demand, according to Jason Toussaint, managing director of investments at the World Gold Council. It looks like physical demand will support the price of gold during any temporary decline based on bearish comments by Buffett or some high-profile traders.

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