The Michael Fuljenz Metals Market Report: January 2012, Week 2 Edition

Gold and Silver led the rise in most global markets during the first week of 2012, with silver rising over 4%. Crude oil prices also rose, due to escalating tensions in Iran, including U.S. Naval presence in the Straits of Hormuz and a boycott of Iranian oil. The U.S. dollar also rose, as Europe's malaise continues. Last week, bond yields in Spain and Italy were 4% to 5% higher than in Germany, for the same currency!

• Gold 52 weeks ago (January 10, 2011): $1368.25
• Gold's average price during 2012: $1606.88
• Gold's London Low for 2012: $1590 on January 3
• Gold's London High for 2012: $1621 on January 6

Last Week In Metals: All markets rose in the first week of 2012: Metals rose an average 3% vs. stocks by an average 1.8%.

What New Factors Could Lift Gold to $2,000 (and silver to $40) in 2012?

According to The Silver Institute, the average price of silver rose dramatically in 2011: Up 74%. Three other metals also rose: Palladium (+39%) and gold (+28%). Silver's dramatic rise was mostly due to its spike last April; silver's average price in 2011 was a record $35.12 vs. only $20.19 in 2010, a 74% gain.

Part of the reason for gold's late-2011 correction was a reversal of fortune in Asia: (1) India's weak rupee and weak economy caused a decline in gold demand during the wedding season, and (2) Chinese leaders feared "gold fever" among its population, so Beijing cut back on the number of gold markets in China.

But what if those sudden bearish developments "suddenly" returned to normal (i.e., net-bullish) in 2012?

#1: What if China Resumed its Gold Promotions? The central planners in Beijing have suddenly realized that private ownership of gold is a powerful expression of personal independence. They seem to fear that "gold fever" could lead toward rebellion against Beijing's control, so on December 20, Beijing said, "No local authority, institution, or individual is allowed to set up gold exchanges." To justify these actions, they cited fear of counterfeit gold (a very real concern, as it turns out), but their sudden reversal came across to global observers as a fear of widespread gold ownership. Whatever the cause, Beijing banned all but two national gold exchanges last month, both of them located in Shanghai. But what if new gold exchanges were well-regulated and citizens came to trust those dealers: Gold demand in China could soar.

#2: What if China's Central Bank followed its own Propaganda and Bought More Gold? Over the last few years, the Chinese government has actively encouraged its people to buy gold as an inflation hedge. In addition, Beijing has been forced to let its currency appreciate in order to avoid a trade war with the U.S. What if Beijing's leaders put those two trends together - a falling dollar and rising gold? What if Beijing followed its own advice and exchanged more of its devalued dollars for more gold?

Zhang Jianhua, director of research at the People's Bank of China, said that China should "purchase gold assets when the gold price shows a favorable fluctuation." At year's end, China was a lowly #6 in central bank gold holdings, according to the World Gold Council. Gold made up only 1.8% of China's $3.2 trillion in foreign reserves. (By comparison, America's 8,133 tons of gold in reserve amount to 76.6% of our foreign reserves, by value, followed by Germany, with 3,396 tons - fully 73.7% of its total reserves.)

What if China merely bumped its gold holdings up to 10% of its $3.2 trillion in foreign exchange? That new buying would exceed 5,000 tons of gold, or almost two year's worth of newly-mined gold supply.

#3: What if More Central Banks Buy Gold in 2012? In 2011, several national banks increased their holdings of gold, including Russia, Thailand, South Korea, Bolivia, Colombia, Kazakhstan, Venezuela and now Turkey. After gold peaked in September, the rate of central bank buying slowed down, but there was one exception: The IMF announced that Turkey added over $2 billion (1.3 million troy ounces) to its gold reserves in November alone, on top of 697,000 ounces in October, a 53% increase in two months. This brings their total holdings up to 5.8 million ounces, worth over $9 billion. If gold holds firmly above $1500 in 2012, while most currencies fall, then more central banks could add gold to their coffers. (Bankers tend to be trend-followers, so if gold either holds level or rises, they could become gold buyers.)

#4: What if India's Economy (or its Currency) Revives? One big cause of gold's recent decline is the sudden slowdown in the Indian economy and a drop in the Indian rupee, pushing the price of gold too high for some of India's price-sensitive buyers, especially during the recent wedding season. Last August, the Indian rupee traded at 44 rupees per dollar ($0.0227), but today's exchange rate is 53 per dollar ($0.01887). This means that gold has actually risen slightly in rupee terms, while it has fallen in dollar terms. That's why fewer Indians bought gold. But what if the rupee revived? Gold demand could soar.

#5: What if India Recognized Gold as a Private Reserve Asset? There is a new proposal in India that could help drive up gold prices by allowing insurance companies to invest in gold. According to The Economic Times, the investment committee of India's Insurance Regulatory and Development Authority (IRDA) could allow leading insurance companies to invest in gold. This proposal would amount to an official acceptance of gold as money. This could cause a rush toward gold among major Indian insurance companies, thereby helping to push up the price of gold and encouraging more private Indians to own gold.

#6: What if More Nations Staged Anti-Mining Riots, Limiting Supply? In 2011, "The Protestor" became TIME's "Person of the Year." This gives tacit blessing to protestors in all areas, including violent protests or sit-in demonstrations against gold mining operations, especially in poor lands, where few can afford to buy gold. Peasants naturally don't like to see their land destroyed to feed "rich investors" in other lands. The most recent example is in eastern Indonesia, where two protesters were killed last month.

We will likely continue to see more protests against big mining companies, which could cause a decline in newly-mined supplies, fueling a rise in gold prices. Everyone loves to own gold, but few want to see a mining company destroying their landscape in order to find more gold. This seems to be another case of "Not in My Back Yard" (NIMBY). Popular aversion to the degradation of gold-mining operations is why gold keeps enjoying superior returns while gold mining companies are mostly money-losing machines.

More 2012 Gold Price Predictions

There's no question that gold's recent price correction has caused some of the gold bears to come out of the closet and claim that they were "right" all along. Rather than say that gold is now a "good bargain," these gold bears speculate on further declines in the coming year.

The bulls have a different, but muted, response. Few are now predicting more than $2,000 in 2012.

Jeffrey Wright, senior research analyst at Global Hunter Securities, looks for $1,800 in 2012, with perhaps a brief spike to $1,900 or $2,000 if Congress and the President keep fighting over spending. If that happens, there will be "pressure on the U.S. dollar and a refocusing on gold as a safe haven asset."

Frank Holmes, CEO of U.S. Global Investors, looks out further than 2012, looking at the next three years, not the next three months. The dollar has already lost 98% of its purchasing power in gold terms since 1971. He predicts that gold will reach $3,600 in five years.

So, it looks like our prediction of $2,012 in 2012 is suddenly a minority position. In Las Vegas terms, that makes us the underdog, just where we want to be! We'll take gold "and the points" any time!

P.S. Apple stock (symbol: AAPL) rose to a record $425 per share today. Some leading stock market analysts are predicting $550 Apple this year, yet we still don't hear any major analyst using the "B" word (Bubble!) for Apple. Instead, they keep pointing to the alleged popping of a gold bubble last September!

Rare Coin Funds Impact Early 2012 Coin Market

I just returned from a major Florida money conference, where I attended three separate industry board meetings over a two-day period. While there, we covered the latest information in some of the most important industry challenges, ranging from Chinese counterfeiting to hotel coin buyers.

On the brighter side, we discovered that rare coin funds could soon pump additional money into the market. There are basically two types of funds interested in coins: Buy and hold funds typically buy popular rare coins and coin sets and hold them for long term appreciation. Trading funds also routinely buy and sell a large spectrum of popular coins that dealers seek to buy in quantity.

Not since the late 1980s has there been so much chatter about the impact of rare coin funds on the market. While these funds were an important factor in the remarkable market gains from 1988 to 1990, they weren't the only factor. I will be closely monitoring some of these funds to see if they raise the capital they expect. If they do, the old adage, "a rising tide raises all ships," may apply.

That was certainly true when I was involved with the Kidder Peabody fund during their record 1989 auction purchase of the Dexter specimen 1804 dollar for $990,000. I later helped sell that coin for well over a million dollars. The 1804 dollar is considered the "Mona Lisa" of coins.

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