The Michael Fuljenz Metals Market Report: October 2011, Week 4 EditionGold rallied Friday, rising $23, but it couldn't overcome a $51 drop on Tuesday and a $33 loss on Thursday. Last week was a roller coaster ride for gold, which rose three of five days - rising $4 on Monday, $22 on Wednesday and $23 on Friday - but gold lost a net $35 (-2%) for the week. In recent months, the stock market has been on a similar kind of roller coaster ride. Most of this manic-depressive mood is caused by the battle between hope and despair in the European bank & sovereign-debt situation. But gold is still up 16.5% so far this year, vs. a loss of 1.5% in the broadest stock measure, the S&P 500.
Last Week In Metals: The metals fell about 2% while stocks rose slightly, but gold still lead paper investments, year-to-date. Global Supply and Demand Fundamentals Point Toward Rising Gold Prices While Europeans and Americans race to print more money to rescue more of their banks, it's not quite so easy to mine new gold. There is no printing press or magic alchemical formula for "printing" or minting more gold. Miners must expend millions of dollars, often finding nothing, in order to discover any new source of a limited amount of gold deep below the surface of the earth. The easy gold has all been found. Now it takes high technology, geological expertise and a large amount of luck to find any more new gold. Most of the world's gold is found in remote places, sometimes in nations run by hostile dictators who want to confiscate or nationalize assets which "foreigners" discovered in their midst. These dictators never spent the money to find these gold deposits, but once some foreign businessman finds the deposit, at great expense, and brings it to market, those gold deposits become fair game for political confiscation. In the last few weeks, we have seen some supply disruptions in Latin America and East Asia, notably in Peru and Indonesia. In particular, Newmont Mining has been forced to shut down its Yanacocha gold mine in Peru, which produces about five million of ounces of gold per year. They had to shut down the mine in order to protect their workers from protesters who blocked a road leading to the mine and set earth-moving equipment on fire. The protestors demand a share of the mining proceeds for local needs. In Indonesia, Freeport-McMoRan operates the world's second-largest copper mine, Grasberg, which also produces gold and silver as a byproduct of copper, the cornerstone metal for China's industrial colossus. But the Grasberg mine has cut back or halted work in recent days, due to labor unrest within Indonesia. On the demand side, the Russian central bank reportedly added another 200,000 ounces of gold to its reserves in September, bringing its total holdings to 27.4 million ounces of gold. With more demand and a relatively static (or shrinking) gold supply, there is nowhere for gold's price to go but steadily up in future years. Demand is also growing among the millions of new middle class families China, India, the rest of Asia and Latin America. Even in struggling Europe, where banks are constantly being bailed out, sensible Europeans are turning to gold instead of the sinking euro. In China, a growing middle class can afford gold. Last week, China's National Bureau of Statistics reported that GDP growth still remains above 9%. China's industrial output surged 13.8% in September vs. a year ago. This fuels more demand for metals. Despite all the worries about debt in Europe and America, the "emerging" markets are growing by leaps and bounds. The International Monetary Fund (IMF) sees global GDP growth at 4% for both 2011 and 2012. This kind of wealth will fuel a constant demand for gold among the billions of people in Asia. Michael Fuljenz's Case for $6,400 Gold by 2015 Unlike Asians, most of America does not yet own gold and is not that interested in gold yet. We haven't yet entered the grips of "gold fever" that overtook America in the 1979-80 gold bull market surge. That's because we haven't really seen any dramatic six-month surge in the price of gold over the last 30 years. With gold now trading at around $1640, down from a momentary spike to $1920, it's clear that gold is not yet trading at any kind of "bubble" or at unsustainably high prices, as it did in 1980 at $850 per ounce. The long bull market in gold and silver actually began in 1965, when LBJ took silver out of U.S. coins. The price of silver doubled, from $1.29 to $2.56, within three years. In 1968, the British devalued their pound and gold pushed above $35 in international markets. The big break in gold came in 1971, when Nixon closed the gold window and the price shot up to $200 per ounce by the end of 1974, when gold finally became legal for Americans to own. (The government kept investors out of gold's biggest gain.) Gold fell to $103 by September 1976. Then it slowly rose to $300 by the summer of 1979. That's when gold took off, tripling within six months. In hindsight, 1980 was the blow-off peak, but we are nowhere near such a peak in today's gold market. In terms of the 1965-1980 bull market, we are in about 1975 now. Gold began its current rise in 2001, so we're 10 years into a bull market, with maybe five more years to go. The important point to remember is that we haven't really come close to a "bubble" yet. From 1965 to 1980, gold gained 25-fold in price, from a fixed $35 per ounce to an intra-day peak of $875. So far, gold is up only 535% from its $255 low in 2001. Today's gold price is equivalent to a price of $222 per ounce in the late 1970s. But if gold eventually grows by a similar 25-fold price expansion (as in 1965-80), we could see gold at a "bubble" peak of $6,375 per ounce by 2015 or 2016. This number is not so outrageous if you consider the expansionary printing-press monetary policies now being followed in America and Europe. Massive "quantitative easing" on both continents drives the value of both the euro and dollar down. The budget deficits in the U.S. and Europe are on the order of 25 times larger than they were in the late 1970s under Carter, so perhaps an even more rapid gain in the price of gold is long overdue. An investment in gold today could still yield another four-fold gain, from $1600 to $6400. Nobody knows the future, but a look at gold's history says we may still be in the build-up phase. 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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