Michael Fuljenz's Metals Market Report: July 25, 2011

Stagnating U.S. Debt Talks Send Gold To New Record Prices, Silver & Platinum Also On The Rise

Gold soared to a new all-time high of $1621 this morning, after trading at $1618 in Asia last night. The August gold contract on the Comex division of the New York Mercantile Exchange hit $1618 in Asia first, then $1621 in New York. The previous record for that contract was $1602.50, and the peak London gold price fix as of last Friday was also $1602. Silver tracked gold higher, reaching $40.93, while platinum hit $1,833. The U.S. dollar fell, due to the stagnation of political talks over the budget deficit and debt ceiling.

• Gold 52 weeks ago (July 26, 2010): $1183.50
• Gold's average price during 2011: $1457.83
• Gold's London Low for 2011: $1316 on January 28
• Gold's London High for 2011: $1602 on July 22

Last Week In Metals: All the metals rose, with gold reaching another all-time high, while stocks inched about 2% higher.

"Gold Has Zero Chance of Rising" - "Sell Your Gold to a Jewelry Shop!" (ABC News)

Last week, ABC's "Good Morning America" interviewed their regular investment commentator, Mellody Hobson, President of Ariel Investments, who advised ABC's large TV audience to sell gold now. In her two-minute analysis, she uttered two amazing statements: (1) Although gold could rise short-term, over the debt deal, gold has "zero chance" of rising from here, long-term, after doubling since 2008, and (2) "I'd run down to my local jewelry and take my old gold and sell it, where you can get a better price."

On the first point, she said gold "can't keep going up like this." She went further, saying, "I would not be a buyer of anything that has gone up over 100% in the last three years." The likelihood of gold repeating its past success is "zero," she said. (But I wonder if she said the same thing back in 2007, after gold had doubled from its 2005 price? The fact that an investment doubles once is no reason it can't double again. After all, her favorite investment, stocks, doubled from 1990 to 1995 then stocks doubled again by 2000.)

For evidence of her assertion that stocks have beaten gold over the long-run, Hobson said that "if you take out the last few years and take the previous 25 years," the stock market has doubled gold, 8% vs. 4% per year. This is a double fallacy: (1) She cherry-picked her favorite years, ignoring gold's best years (pre-1980 and post-2007), while focusing on the stock market's best 25 years (1982-2007). Why do stock analysts often compare gold to its 1980 peak year, while comparing stocks to their bottom year (1982)?!

Then she said that the stock market "has been, and will be, the better investment over the long term." Not so. As you can see from the tables at the top of this page, gold is up 452% since January 1, 2000, vs. an 8.4% drop in the S&P 500, the most-watched stock index. If you go back 40 years to this date in 1971, gold was fixed at $35 per ounce and the Dow was at 888. Since then, gold is up 46-fold, and the Dow is up 14-fold, so gold is 3.3 times better than stocks over the last 40 years. Gold also has a big advantage going back 10 or 20 years, but the stock-centric analysts often choose 1980-82 as their starting point!

Besides, the Dow Jones and other stock indexes constantly change the composition of their stock index, to the index's future benefit. After all, they are in the business of marketing the value of stocks. Gold, by contrast, is a constant. One Troy ounce of gold is the eternal global wealth standard. It never changes.

Her closing statement was "I would run down to my local jeweler, where you can sell it and get a better price." That is an astounding claim from a person who has apparently never tried to cash in on a generic piece of gold jewelry, coin or bar. Some jewelry stores are known for their underbidding on gold items brought to their door for ready cash sale. Most surveys by third parties point to reputable coin dealers as offering a much better price for gold.

New Gold Realities Contradict the "Gold Bubble" Myth on Wall Street

In the last 10 years, we have seen several new realities emerge, giving gold a firmer foundation than it had in its rapid 1976-80 rise - the years Wall Street will use, to underline gold's history of "bubbles."

#1-Start with central banks, which sold gold regularly from 1999 to 2009, while gold was rising. Now, according to the World Gold Council, central banks are net buyers for the first time in 21 years. Global central bank gold reserves rose by more than 900 tons over the last three years. In the previous three years (2005 to the dawn of the global financial crisis in September, 2008), banks sold 1284 tons of gold.

#2-Another new reality is the enrichment of India and China, leading to more middle-class gold buyers in that overpopulated and rapidly growing region. China and India accounted for 58% of gold purchases in the first quarter of 2011, according to the World Gold Council, up from 34% five years ago. The Asian nations have always believed in gold; now they have the cash to buy it, and the motivation, due to rising inflation. India's latest annual inflation rate is 8.7%, while China's inflation rate is 6.4% and rising.

#3-The big demand increase in the United States comes from exchange-traded funds (ETFs), which did not exist a decade ago. These ETFs own 2,155 tons of gold, according to the World Gold Council, giving the world a whole new source for physical gold demand to back the ETF "paper" shares. One such ETF ("GLD") holds enough gold to be one of the world's top-10 "central banks" in terms of gold holdings.

#4-Gold's status as a reserve currency is gradually being upgraded. While central banks reverse course and buy gold, some jurisdictions (like Utah and Switzerland) are giving gold a limited legal-tender status, and private companies (like J.P. Morgan) are now allowing gold as collateral for securities lending. Other official institutions (like the University of Texas and Texas Teachers) are adding gold to their pension fund, while the European Parliament recently agreed to accept gold as collateral. This is a "creeping gold standard," a way in which gold gradually moves from an obscure speculation to an official reserve asset.

Gold's Magic Formula: Supplies are Shrinking, while Paper Money Proliferates

On the supply side, gold miners are not able to supply much new gold, even at $1600 per ounce. In the latest "Bull & Bear's Resource Investor," mining analyst Lawrence Roulston pointed out that the average gold grade in the 1960s was 12 grams per ton of ore. That dipped to four grams/ton in the 1990s and 1.5 grams/ton now. That's a microscopic amount: There are 31.1 grams per Troy ounce, so 1.5 grams of gold are worth $78. How do you find, mine, dig and separate that $78 in gold from a ton of dirt, profitably?

Roulston shares an example: "A little company called Richfield was just taken over by a larger company for a half billion dollars. That deal gave nine times return to shareholders in one year. What is really interesting is that the half billion dollar deposit has a grave of just 1 gram/ton. It will require conventional milling and the deposit is located in the mountains of British Columbia. A few years ago, a one gram gold deposit was interesting - if it was in Nevada and heap leachable. Even one year ago, Richifield's deposit was given little value by investors. Today, it is worth a half billion dollars. Most investors and analysts do not yet understand this new reality: There is a shortage of deposits and grades are lower."

Meanwhile, Bernanke is fulfilling his earlier promise of throwing dollar bills out of helicopters "if necessary." Of course, there will always be budget deficits to make such dollar liquidity "necessary" in his view. With the easy printing of paper and the difficult delivery of one gram of gold per ton of dirt in faraway, nearly inaccessible northern British Columbia, the "Gold vs. Paper" choice is clear.

10 Reasons Why Rare Gold Coins Are Heating Up!

1. Dealers are currently not able to buy gold coins efficiently in Europe.
2. Europeans are less willing to sell their gold coins due to economic turmoil.
3. United States customers are not selling as many gold coins to dealers as in previous months. Many would rather hold than sell.
4. Dealers across the country report increases in sales.
5. Many dealer inventories are at historically low levels.
6. Advertising by dealers is up in all media. It seems like every day I see gold ads on TV or in magazines.
7. Ad response from new customers is up in many cases.
8. Many old customers are interested in buying gold coins again.
9. Gold breaking all-time records and passing $1,600 creates lots of good gold publicity and public interest.
10. Many gold coin prices are starting to rise, creating an urgency to buy before they go higher.

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