The Michael Fuljenz Metals Market Report: September 2011, Week 1 Edition

Gold broke $1900 in foreign markets on Labor Day, while the U.S. market was closed. This $16 move was all the more impressive since silver declined $0.38 at the same time. When gold rises and silver falls, that's usually a sign of financial crisis, with gold assuming the role as crisis hedge and a safer alternative to paper currencies. Gold's major fuel this time was a renewal of the banking crisis in the U.S. and Europe, including a tax revolt in Italy and Greece as some key European bank-financing deadlines near.

• Gold 52 weeks ago (September 6, 2010): $1249.00
• Gold's average price during 2011: $1506.28
• Gold's London Low for 2011: $1316.00 on January 28
• Gold's London High for 2011: $1896.50 on September 5

Last Week In Metals: On Friday's weak jobs report, gold soared $59 to $1885, while stocks tumbled over 250 Dow points.

September Opens with a Strong Gold Market and Collapsing Stock Market

As the wild market month of August closed last Wednesday, gold finished August at $1815, while the stock market was rising strongly after see-sawing downward all month. The Dow recovered in the final week of August to close down 5% for the month, but it was down 18% earlier in August. Gold did much better in August, rising 11.5%, but as the month came to an end, gold was well off its $1900 record peak. Expect continued volatility in September.

Early last week, the skeptics were saying that the gold bubble had popped, but in early September gold not only shot back from its $1716 August 25 low but quickly set new highs above $1900. The intra-day high Monday was $1908.40, a new record, and the intra-day high on Tuesday was $1909.70, another new high. Here's the divergence between stocks and gold over the first 68 days of the third quarter of 2011:

*As of noon (Eastern), Tuesday, September 6

July and August are traditionally gold's slowest time of year - gold's summer doldrums - but gold has beaten stocks by a combined 35.72% (composed of +24.54% in gold and -11.18% in Dow Jones stocks) for the quarter so far. And that's before we enter gold's strongest season for physical demand, September through December, which overlaps the stock market's worst historical months, September and October.

Gold's latest surge began Friday, when the December gold contract rose $48 on the COMEX exchange, rising $80 (+4.4%) for the week and $170 (+10%) from its London morning price fixing of $1716 on August 25, less than two weeks ago! Part of this rise is the normal September rally as global jewelry fabrication escalates in advance of the fall holiday season, particularly in India. Edel Tully, a gold analyst at giant Swiss banker UBS, said on Friday that "historical physical sales to India...for the last three years shows that demand typically accelerates in the last four and five months of the year," with fourth quarter gold volume in India typically 150% higher than the first quarter and 65% higher than the second quarter.

A New Banking Crisis in Europe and America Lifts Gold & Sinks Stocks

On August 31, The Wall Street Journal had this headline in the Opinion section: "Beyond the Gold and Bond Bubbles," by economist David Malpass, who said that the recent fall in gold "meant less fear that the financial system would collapse." Malpass had some common-sense advice in the article about how Fed chairmen should monitor the price of gold to discipline the dollar. This is what Paul Volcker did in 1979-1987 and what Alan Greenspan did for his first 14 years in office, 1987-2001, before 9/11 turned him into a profligate "do-anything-to-stimulate-the-economy" kind of Fed Chairman. And now, Bernanke is reverting to the inflationary policies of the Fed of the 1970s, under Arthur Burns and William Miller.

European Banks in a Pickle

Late last week and early this week, gold soared and stocks fell off a cliff, due in part to a new wave of concerns about U.S. and European banks. Overseas, banks in Europe are in a new pickle about how they categorize sovereign debt. There will be a day of reckoning soon. The International Monetary Fund (IMF) is reviewing Greece's performance before issuing new loan disbursements; France will vote on whether to contribute to Greece's rescue; a German court will rule on whether Chancellor Merkel broke the law in bailing out Greece last year; and the Group of Seven finance ministers will meet in France later this week. The PIGS of southern Europe (Portugal, Italy, Greece and Spain) are basket cases. Italy is staging a one-day general strike today. Meanwhile, Italy's businesses have defeated a tax surcharge and Greek restaurant owners are refusing to collect the onerous new 23% value-added-tax.

In the U.S., banks have severe problems with servicing real estate loans. Last Friday, the U.S. government threatened to sue 17 banks over their "robotic" approval of unsupervised mortgage papers sold to Fannie Mae and Freddie Mac. The White House backed away from this hard-line stance today, perhaps to curry political favor in key states, but the truth remains that most U.S. banks have oceans of bad real estate loans on their books. These problems are not easily resolved. As a result, banks are afraid to loan any money to qualified small businesses; they require more collateral up front, validating the old proverb that "banks only loan money to businesses that can prove they are so rich that they don't need the loan."

Gold Is Likely To Trend Higher On Obama's Thursday Talk And The Fed's "Next Mistake"

America is obviously feeling restless about the ultra-slow business recovery, with NO new jobs added in August, and the jobless rate stuck above 9%. Last week, the Conference Board reported that consumer confidence plunged 25% in one month - the largest one-month decline in 21 years! This Thursday will be an important day. First, Fed Chairman Ben Bernanke will speak at 1:30 (EDT) and then President Obama will address Congress at 7:00 on his "job growth and debt reduction plan." (The talk is carefully designed to end before the Saints and Packers kick off the 2012 NFL season at 8:30 pm Eastern).

The President will most likely disappoint both sides of the aisle, by "not going far enough" in cost-cutting for Republican Tea Party members and not going far enough in job stimulation for Democratic activists. Leaders of both parties need to meet more.

It's humbling to note that every one of President Obama's major economic advisors have already jumped ship, less than three years into his term, and he keeps appointing economic advisors with near zero real-world business experience. The President has to keep retreating on his more extreme measures since he and his advisors seem to have little conception of the real-world cost of their brainstorms. The latest example is a pull-back on EPA ozone requirements. The President has to "get real" on the jobs crisis by abandoning his quest for a theoretically perfect world at the expense of lost jobs and dollars. He also has to help businesses get needed permits more efficiently and reliably, more like Texas and less like California. Studying the Chamber of Commerce's six point job creation plan might be useful to Congress and the President.

Gallup Picks Gold

A Gallup poll conducted in August just as the stock market was tanking - again - and gold was soaring revealed that Americans prefer gold over all other major assets. "Gold is Americans' top pick as the best long-term investment regardless of gender, age, income, or party ID, but men, seniors, middle-income Americans, and Republicans are more enamored with it than are other Americans," wrote Gallup chief economist Dennis Jacobe in the report.

According to the Gallup poll, 34% of Americans considered gold the best long-term investment, twice those who chose stocks and bonds (17%). Real estate was a distant runner-up to gold at 19%, while savings accounts/CDs and bonds trailed at 14% and 10% respectively.

"Traditionally, gold -- like the U.S. dollar -- has been a safe haven in times of economic and political turmoil. It is a globally accepted store of value and one of the most highly desired precious metals," said Jacobe in the report.

"The demand for gold has soared in recent years, as the financial crisis engulfed the global banking industry. More recently, the efforts of nations around the world and their monetary authorities to stimulate the global economy and avoid a repeat of the 1930s have made gold even more attractive. Current sovereign debt problems have only added to the demand for gold," Jacobe added.

Gold Fever Inspires Thieves

• In Oakland, California, gold chain snatching has become a major problem, especially for women and particularly around BART transit stations.
• Overseas, Gold chain snatching has increased in London, China, and especially in India, the world's biggest gold buyer.
• France recorded 183 armed robberies of jewelers in the first half of 2011, up from 138 a year ago. "If gold is a safe haven for people with savings, it is also becoming it would seem a safe haven for armed robbers," said Frederic Doidy, an officer with OCLCO, a police agency focused on organized crime.

Why Many Gold Coin Prices Rose While Gold Prices Declined

Since the bull markets of the 1970s, I have watched gold coin prices, at some point in time, outperform gold bullion prices. With the exception of a period when many Indian gold coins rose dramatically during 2005 to 2007, that has typically not happened in the 21st century. Of course gold stocks were often bought in hopes of multiplying gold's gains, but that hasn't been the case like in the past, either.

In the past few months, however, there has been a relative shortage of many rare gold coins dealers need for customers. The dealers I trade with have noted that they are selling far more gold coins than they are buying the past two weeks. Buying gold coins out of Europe has slowed to a trickle and Europeans are often lined up to buy gold coins, not sell. Dealers' inventories were already reduced, since many banks have reduced loans to dealers by up to 30%, regardless of collateral, after the financial banking crisis of 2008. This has caused many dealers to carry less inventory to meet rising demand, pushing up prices for many rare gold coins.

As you may notice, many dealers are buying more ads to take advantage of increased customer interest. This results in increased demand for a decreasing supply. That is the formula for rising gold coin prices.

Finally, dealers who make their living scaring collectors into prematurely selling their coins are not as effective in a rising market, especially those who have falsely represented the recently-repealed 1099 provisions of Obama care or the Dodd-Frank issues. Fewer collections are coming onto the market to replenish dealer inventories.

This is not the time to sell and especially not to hotel buyers or other traveling buyers who use false scare tactics. When it's time to sell for best prices, seek out a major market-maker, like us, in the coins you own to get the best prices.

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