The Michael Fuljenz Metals Market Report: September 2011, Week 2 Edition

Gold hit new highs ($1923.70 on the intra-day futures contract) early last week before consolidating to the $1820s again this week, as gold re-tests its new $1800 floor. The main reason for gold's latest decline is a huge rally in the U.S. dollar after Jurgen Stark, Germany's chief representative in the European Central Bank (ECB), resigned from the ECB, citing "personal reasons" but also expressing his frustration at Germany's continued role as the sole responsible "adult" in the European union, continually rescuing the spendthrift Mediterranean PIGS (Portugal, Italy, Greece and Spain). This sent the euro down 5% last week, from $1.44 to $1.36, accounting for all of gold's price correction late last week (and more): Gold in Europe rose from 1316 euros last Monday ($1895 divided by $1.44) to 1348 ($1833/$1.36) this Monday.

• Gold 52 weeks ago (September 13, 2010): $1246.50
• Gold's average price during 2011: $1516.54
• 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: Gold rose early then fell, while stocks fell even further and faster, dropping 303 Dow points on Friday.

How Europe's Woes Cause Wide Swings in the U.S. Dollar and Gold

If you only look at the price of gold in U.S. dollar terms, it's easy to miss the rising gold market in other lands. The price of gold rose to new record highs in Europe late last week, as the value of the euro fell to the U.S. dollar and the neighboring Swiss franc. The Swiss National Bank even had to undertake heroic measures of buying "unlimited" quantities of euros and other sagging currencies in order to keep the Swiss franc from shooting higher. (That would cripple Swiss exports and their tourism industry.)

Beware of Limited Indexes About Gold

The commentators (such as The Wall Street Journal, in its weekend edition) conclude from gold's wide swings that the "Options Market Questions Gold's Safe-Haven Status." The Journal cites the "gold VIX" (the volatility of the gold futures price) as their "proof" that gold is "no safer than stocks," which have also suffered wide swings lately. This analysis ignores the more stable, slow and steady rise of gold in other currencies. Long-term, gold is on a rising arc. Daily prices are volatile, but the trend is clear: Up.

Europeans see the possible collapse of their financial institutions and are buying gold in terms of their sinking euros. This drives the euro down and the dollar up, causing gold to fall in dollars and rise in euro terms.

Last week, there were strikes and tax revolts in Italy and widespread tax resistance in Greece. Very soon, Greek bonds could begin defaulting, possibly causing many European banks to fall like dominoes. Those European banks invested too heavily in "safe" euro-bonds, but Europe is not a united continent. It is made up of a few solid economies (Germany, Belgium and the Netherlands), the collapsing Mediterranean PIGS, and a weak France caught in the middle. None of those nations control the value of the euro, like the Federal Reserve controls the dollar, so bad behavior of the weak nations brings the strong nations down. This has led Germany's top representative to the European Central Bank (ECB) to resign in frustration. This week, the euro continues to decline, pushing the dollar up and gold down in mirror image to each other.

Gold and Strange Wiki-Leaks

Wiki-leaks issued a strange story last week about some cables between China and the U.S., describing how the U.S. seemed to be twisting Beijing's arm to buy more Treasury bonds and less gold in 2009, right before China revealed that it had accumulated more gold in their central bank. China apparently said that the U.S. and Europe "intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar." The Chinese did the opposite, theorizing that increasing their gold reserves would increase China's "international clout."

The most bizarre cable came on December 4, 2008, when the U.S. apparently warned China that their acquisition of gold would be a problem for the U.S. and European governments in their consideration of restoring a partial gold reserve system. At the time, the U.S. and Europe held the majority of central bank gold, which would give Europe and America greater control at resurrecting a "partial gold standard."

Will the U.S. and Europe return to a "partial gold standard"? For the answer, look at page 1 of today's metals report: America and Europe are in no financial condition to return to gold. Does a "couch potato" run a marathon before going into training? America and Europe have done everything in their power over the last three years to debase their currencies in a "race to the bottom," by printing trillions of more units of their respective currencies. A return to even a "partial" gold standard would uncover the nakedness of these monetary emperors. There would quickly be a massive flight out of dollars and euros and into gold.

We can see this in the example of the Swiss franc. In recent months, the Swiss National Bank hinted at gold backing to their currency and the value of the Swiss franc shot to the sky. Switzerland is one of the most responsible financial nations on earth - the "poster child" for conservative banking - and even a whiff of gold backing for that currency sent Swiss francs through the ceiling. America and Europe cannot risk a total debasement of their paper currencies through even a "partial" return to the gold standard.

Gold Favored by the People

The good news is that individual investors are returning to their own private gold standard by exchanging their paper money for gold and silver coins and bullion. And central banks from all over the world are buying more gold this year, so the Chinese were right to buy gold at lower prices. As for strange Wiki-leaks on gold, you never know what motivates diplomats and bureaucrats to issue veiled threats in private, but this sounds like the U.S. Treasury talking up their product (Treasury bonds) while dismissing the competition (gold).

Bolivia, Romania Jump on the Gold Train

Bolivia and Romania have joined the growing number of government central banks turning to gold to line their foreign reserves vaults. Though neither country is big enough by itself to have major impact on gold markets, in concert with other emerging-market government banks taking similar actions along with major players like Russia, China, and India, the demand for gold keeps ramping up.

Major Gold Events in History on September 12 & 13

On September 12, 1857: The S.S. Central America sank off the coast of South Carolina, at the cost of 423 lives and a cargo of $1.6 million (face value) in gold coins from the San Francisco mint. The loss of these gold dollars, small by today's standards, exacerbated the credit crunch and deepened the Panic of 1857.

On September 13, 1983: The U.S. mint struck its first gold coin in 50 years, the Olympic Eagle. This ended a 50-year famine in U.S. gold coins. In 1933, FDR banned gold, confiscating common U.S. gold coins. For the next 42 years, holding common U.S. gold coins was punishable by huge fines and up to 10 years in prison.

Historically September is Great for Gold

September is historically gold's best month, as fabricators buy product for holiday jewelry trade. Even though speculators dip in and out of gold ETFs, the physical jewelry trade is still strong and predictable.

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 three 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.

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