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

Gold opened the new week, new month and new quarter with a $40 rise on Monday morning, October 3. (Friday's last London fixing was $1620. Monday morning's fixing was $1660). After gold's rapid fall on the first three trading days of fall (September 22-23 & 26), gold set a new floor at $1600 (and silver at $30). Gold and silver have attracted powerful new buying from around the world, including demand from India's wedding season. The European debt crisis is obviously still unsolved, as is the U.S. debt crisis.

• Gold 52 weeks ago (October 4, 2010): $1313.50
• Gold's average price during 2011: $1533.73
• 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: After bottoming last Monday, gold recovered by week's end, while stocks continued to decline.

A New Look at Gold and Silver in the Third Quarter

Despite its recent correction, gold actually rose 7.6% in the third quarter, while most other investments fell. This feat is even more impressive when you consider that the dollar rose 9% to the euro last quarter - meaning that gold rose 17% in terms of the euro: On July 1, the euro was $1.45 and gold cost 1038 euros. By September 30, the euro fell to $1.33 and gold rose to 1218 euros, 17% higher than June 1.

By contrast, the Dow Jones index fell over 12% in the third quarter, while the broader S&P 500 stock index is down 14.3%. The major European stock index is down 17% over the last 90 days, so it turns out that gold was the best major investment last quarter, despite what people say about a "bubble" popping.

In the last year, there have been quite a few articles in the general press saying that September is gold's best month of the year. (If you Google "Gold best month September," you will get over 1.2 million hits, most of them dated 2011.) According to Bloomberg, gold has risen by an average 2.51% during the last 42 Septembers (1969-2010). This beats any other month by almost 1%. The next best months are January and December at +1.56% and +1.53%, respectively. As we have written here before, there is a common-sense reason for gold's annual September surge. Gold jewelry fabricators must order a lot of raw gold for making jewelry to service the major gold-giving holidays that run from October to February each year, including Ramadan, India's wedding season, Christmas, the Chinese New Year and Valentine's Day.

As a result of all this writing about "September is gold's best month," investors poured into the metal during July and August, pushing it up too far, too fast. Then, with few buyers left, gold began falling, causing short-term trend followers to sell, and then the rout was on. Gold hit panic lows of $1535 last Monday, September 26, down $375 in three weeks from its intra-day peak of $1910 on September 5.

Gold's 42-year Average vs. 2011, by Month

*Average monthly change, 1969-2010; Source: Bloomberg

As you can see, gold fell sharply this September, but it still doubled its normal third quarter growth rate (+7.61% this year vs. +3.36% average). Now that September has lost some of its gold mystique, it's time to return to the fundamentals for future growth and not count on the calendar to deliver predictable gains.

What's Next in Gold?

The press tells us that "October is gold's worst month in history," and that is true. But it's helpful to realize that history has been turned on its head this summer, so October might be great this time around!

As it turns out, gold's sharp decline last Monday, September 26, only brought gold back to its 40-week (200-day) moving average, an important technical support level. The fact that gold bounced back sharply from its lows below $1600 argues for a return to a more normal price increase in future months. Gold hasn't traded more than a few dollars below its 200-day moving average since late January of 2009.

Global demand rose strongly after gold's September 26 dip. According to a trader at UBS, Edel Tully, the physical demand for gold last Tuesday was "not just decent, it is exceptionally strong." Another institution, Standard Bank, said last Thursday that "support is broad-based throughout Asia, with physical demand in places like Thailand and China also rising," adding that "the current buying momentum is much stronger than the respective comparable periods in 2009 and 2010." Even the relatively bearish Dennis Gartman said last Friday that "it does indeed appear that the worst has been seen in gold, and that the panic lows seen Monday in Asian trading have held...We have weathered the storm." Amen!

India to Buy Up World Gold Supply?

India's gold demand soared over the past year and shows no signs of letting up. At even conservative estimates, within a couple of years India's gold demand will consume every ounce of total world gold mining supply.

The numbers tell the story.

The world's gold mining supply is about 2,500 tons per year and is not increasing. In fact, in recent years, it has been flat or declining slightly. Last year, India consumed 1,034 tons of gold to meet jewelry and investment demand. That's 41% of total annual global mining production.

In 2010, Indian gold demand for coins, bars and other investments rose 83%, while gold jewelry demand increased 36%, according to the World Gold Council. By the 2nd quarter of 2011, investment demand for gold in India zoomed 78% year-over-year, while jewelry demand jumped 18%.

Taking a very conservative projection of just a 25% annual rise in India's gold demand, by 2014, just over two years from now, India will consume all of the world's annual gold mining supply.

Of course, India will have to compete with the other huge gold consumer in the world - China, whose gold demand has also been rising sharply. There is also stiff competition for gold supply from exchange traded funds. And central banks have reversed decades of gold dumping and are replenishing their gold reserves. Then there is the surging interest from retail investors for gold bullion that has been creating chronic shortages of bullion coins and gold bars as the world's mints struggle to meet demand.

The obvious implication is that a severe supply crunch for gold appears likely to develop over the next couple of years.

Bubble? What gold bubble?

Record Demand for Canadian Mint Grizzly, Cougar & Maple Leaf Coins

The Royal Canadian Mint expects to see sales of its silver bullion coins, including the new silver cougar, to climb by 30% to a record 25 million ounces this year. The RCM also expects gold sales to match last year's record of 1 million ounces according to John Moore, executive director of bullion and refinery services at the RCM.

Would The U.S. Government Consider "Gold Confiscation" Again?

I am increasingly asked this question by collectors, investors and other dealers at conventions and and press interviews. Could the government "confiscate" our gold again? My answer has been "while anything is possible, confiscation is not probable." Today's gold investors are nowhere near as "docile" as most Americans were in 1930s. Many gold owners today would resist any attempt by the governments to seize their privately-held gold.

We always pay close attention to any potential legislation which could harm our business. For example, my involvement this year with the Texas legislature helped prevent the business-killing and convention-killing 30-day-hold provision, while also helping legislators retain the legitimate law enforcement provisions and the other consumer-friendly provisions in the new law.

In addition, I believe that the new restrictive actions in European countries could lead to decreased gold coin sales by Europeans to American dealers. This could result in larger purchases of rare gold coins by individuals who believe these "antique" gold coins provide a greater degree of protection from "confiscation" than bullion. The end result could be increased demand, less supply and rising prices for gold coins, especially if a lot more dealers start scaring people to buy antique gold coins with this information. We believe that you should avoid any "scary" dealers, those who try to base their sales solely on scary stories of potential future "confiscation".

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