The Michael Fuljenz Metals Market Report: October 2011, Week 3 EditionGold gained $48 (almost 3%) last week, after gaining 1% the week before. Part of this gain came from a weaker dollar, after European leaders pledged (once again!) to solve the euro-zone crisis before the next meeting of the Group of 20 (G-20), beginning on November 3. In addition, gold's Friday surge arose from a surprisingly strong retail sales report, showing that consumers have some extra pocket money. Silver rose even more (+3.8%) last week, while platinum rose 4.1% and copper rose 4.8%. These three metals all have industrial applications, so the surprisingly strong retail sales figures helped those metals.
Last Week In Metals: Gold, silver, platinum and stocks all rose last week, in part due to a sinking U.S. dollar vs. a rising euro. More Details on the Latest Wave of Gold Demand In Hong Kong, China, India and Dubai In Hong Kong this morning, Monday, October 17, banking authorities introduced gold trading quoted in Chinese yuan, opening up the mainland Chinese market to trading in China's international financial center, Hong Kong. Ever since China took over Hong Kong in 1997, many Chinese have held their yuan in Hong Kong banks, which are deemed far more advanced, sophisticated and reliable than the mainland Chinese banks. The Chinese Gold & Silver Exchange is marketing this new service, called the "Renminbi Kilobar Gold," to both retail and institutional investors. (Renminbi is the official name of the yuan.) In China, investors can now trade plastic or paper for gold coins in an ATM machine. The first machines were placed in Wangfujing, Beijing's traditional shopping district. The enthusiastic initial response by the Chinese public has now encouraged the Communist leaders to allow 2,000 more gold ATMs in China. The machines are price-sensitive, updated every 10 minutes. Trading limits are a rather generous 2.5 kilograms of gold (80.4 ounces), worth $135,000. The ATMs operate 24 hours a day, 365 days a year. These ATMs could make China the world's biggest consumer of gold in 2011. In 2010, China trailed India, but the World Gold Council said China passed India in gold demand as of the first quarter of 2011. India is making a bid to reclaim its traditional world-leading gold-demand perch by expanding the role of the national mail service (India Post) to sell gold coins during the upcoming Diwali festival season. The number of postal outlets has been increased from 500 to 700 this year. Ajay Mitra, managing director of the India branch of the World Gold Council (WGC), says, "We anticipate the festival season to be a roaring success." A recent JP Morgan report says that Indians own more than 18,000 tons of gold (11% of the world above-ground supply), worth about $1 trillion. The report says that India's gold holdings are more evenly distributed among the 1.1 billion Indian people than stocks. Bharat Iyer, head of India equity research at JPMorgan, says, "The Indian retail investor, through thick and thin, has invested a substantial quantity in the best performing asset class in the last 2-3 years, which is gold. Indians always have this fascination for gold and rightly so. It has done well for them." He adds that "gold is an asset class with a lot of defensive quality. I don't think that fascination is going away...or needs to go away." Dubai: The Wall Street Journal has reported that the Dubai gold market is now seeing more demand for bullion bars than jewelry. They quote gold and commodity broker Pradeep Unni, who says, "Now, one can see men, finding themselves with a bit of spare cash, go into a jewelry shop and buying ten-tola bars." (A ten-tola bar, or TT bar, is a traditional Indian measure of about 3.75 ounces.) "Sales of gold coins and TT bars are up 30-40% on the year," said Mr. Unni, since "they aren't as expensive as the kilo bar." By Contrast, American Investors are Still Mostly Speculators, not yet Gold-Savvy While Asian buyers are price-sensitive, increasing their purchases when prices are down, most Americans are still new to gold, so they think of it as a "hot" investment for a time, before the fickle crowd turns to the next fad. These "weak" holders sell in herds. Three articles in The Wall Street Journal last week are symptomatic of the American disease of crowd-following manias. Gold is a "bubble," they say: "Gold's Price Slide Hits Paulson Hard" (by Gregory Zuckeman and Steve Eder) describes how the gold-bug billionaire John Paulson was hit unusually hard by gold's late-September collapse. His gold-oriented fund lost 16.4% in September vs. an 11% drop in gold bullion. Year-to-date, through September 30, his fund gained just 1% vs. a 16% gain for gold bullion. That's because he invested so heavily in gold-mining stocks, which have underperformed the metals by a wide margin this year. His stock-oriented funds, however, have fared far worse than his gold fund. Paulson Advantage is down 32% this year and the leveraged Paulson Advantage Plus fund is down 47% through September 30, so gold wins again. "A Golden Age for Gold Has Lost Some of its Luster" (by Francesco Guerrera) is fairly snarky in its delight over gold's recent decline (ignoring gold's strong recovery so far in October). The young author views the metals like a buddy movie: "If the gyrations of the commodities market were to be turned into a movie, gold would be the sad sack with unexpected powers of redemption, played by Paul Giamatti. Inert and largely useless in boom periods, gold sits around in its drab living room moping. But, as economic gloom spreads and recession fears grip the world, gold, helped by its more-volatile buddy silver (Owen Wilson) stages a triumphal comeback." His title for this movie is "No Yield," mocking gold's "inert" income stream (while failing to mention that bank CDs and Treasury bills offer very little yield.) P.S. If precious metals were cast by Hollywood, I could see Clint Eastwood as gold or Bruce Willis as silver.* And in the weekend edition, "Time to Ditch Commodities?" (by Ben Levisohn and Daisy Maxey) opens up by saying that "Commodities are the market's equivalent of a good-time Charlie: They go up when the economy is booming, but they don't provide much diversification during times of stress." The article goes on to show that commodities are tightly correlated (82% positive correlation) with the stock market over the last six months, but then the article refreshingly says gold is different: "Gold might be one exception to the trend. It has a correlation of minus 0.79 (79% negative correlation) to stocks over the past six months. "Even after its recent 11% decline, gold is still up 15.8% over that period [six months], vs. the S&P 500's 8.1% drop." The authors conclude, "Right now, gold is looking particularly attractive." So that's our happy ending. Some writers understand gold, even though most of the mainstream press is against gold or fails to understand the gold market's unique dynamics. But those few Americans who understand gold's role as long-term financial insurance against the inevitable inflation of printed-paper money supply will continue to buy and hold gold through good times and bad. As time goes on, the rest of America will be brought, kicking and screaming, into the Old World view of gold as ultimate savings. *Maybe Francesco Guerrera should read the long-term track record we print here each week at the top of the first page. This year, gold is up 19.1% vs. -2.6% for the S&P 500. Since the start of 2000, gold is up 479% vs. -16.6% for the S&P 500. So far, Francesco Guerrera is zero-for-the-21st century! There are Double Eagles -- and then there are Double Eagles Type II Liberty Head Double Eagles ($20 denomination gold coins minted from 1866 to 1876) are becoming increasingly difficult to locate in the marketplace. Many of them have tripled in price since I began dealing in them in 1995. Their rarity and historical significance have contributed to the upward trend, along with the liquidation of shipwreck hoards of Type I Liberty Double Eagles (minted from 1849 - 1866 without the motto, IN GOD WE TRUST) that stimulated interest in the Type II variety. Many $20 Liberty coins struck at the Carson City Mint also are trending higher due to recent increased demand and always limited supply. Many CC Mint Morgan dollar dealers and collectors are turning to CC Double Eagles as an additional area of interest, and that's one of the reasons we're seeing more demand for the CC $20s. Look for this trend to continue. Metals Market Report Archive >
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