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

Gold rose most of last week until Friday, when gold fell $37 on the London afternoon fix before rising $10 late in the day in New York. This was mostly due to a dollar rally over Greece's latest financial crisis (pushing the euro down), plus the Fed's unrelenting attempt to keep interest rates depressed. Net-positive supply and demand considerations (discussed below) are keeping gold above $1700, but the speculators have not yet returned to push gold up to new record highs. Gold speculators are "on vacation." Data from the London Bullion Market Association (LBMA) says the gold market has been virtually abandoned by speculators since last September's steep correction. When they come back, we'll likely see $2,000 gold.

• Gold 52 weeks ago (February 14, 2011): $1365.00
• Gold's average price during 2012: $1677.66
• Gold's London Low for 2012: $1590 on January 3
• Gold's London High for 2012: $1751 on February 2

Last Week In Metals: Gold fell $22 (-1.3%), silver dropped 1.1%, platinum rose 0.5%, and the S&P 500 (stocks) fell 0.2%.

The Dollar And The Euro Continue Their "Race To The Bottom"

Greece was in the news again last week, unable to come up with minimal ($4 billion) spending cuts to qualify for yet another mega-bailout of $172 billion. Only at the last minute, midnight Sunday night, did the Greek Parliament agree to those cuts, and even then the Greek people are likely to resist these painful cuts, due to the nation's 18.2% unemployment and an economy that is shrinking by 4% to 5% per year.

German voters are also tired of bailing out the Mediterranean PIGS (Portugal, Italy, Greece and Spain). They point to Ireland, which worked its way out of a similar morass by hard work and austerity. In the end, Europe looks a lot like the U.S. in 1860 - ripe for a civil war between the rich north and poor south.

This pushes the euro down and the dollar up, temporarily, until investors recognize the similar problems brewing in America. President Obama's 2012 budget actually plans to widen the budget deficit above 2011 levels, not shrink it. He keeps recommending new spending programs. As a result, the U.S. Treasury could face another credit downgrade. Six months ago, S&P withdrew America's high (AAA) rating due to profligate spending and rising deficits. Since then, Congress and the President have made no progress.

The Wall Street Journal reported on Friday that the Fed bought 91% of the new long-term (20-30-year) Treasury bonds issued in the last four months, keeping long-term U.S. Treasury rates artificially low. The Federal Reserve has kept interest rates near zero for three years and has promised to do so for at least another three years, all in an attempt to save our banking system and reduce the cost of the federal deficit. Jack Lew, White House Chief of Staff, even said this Sunday, "The time for austerity is not today!"

More Problem Banks

It's not working. There are now more "problem banks" than at the height of the 2009 financial crisis. The record number of problem banks was 1,066 in 1992, during the savings & loan crisis, but the second highest number (888) happened last year. In the financial crisis of 2008-09, there were barely 700 on the list. In addition, 417 banks have failed in the last three years, since the peak of the recent financial crisis.

GOLD DEMAND KEEPS SURGING IN ASIA

Last Sunday night, 60 Minutes aired a segment on gold buying in India, showing how important the wearing of gold has become, especially at weddings. This is not new. India has loved gold for many centuries, but what is new is that India is much richer than it was in previous decades. The CBS program pointed out that there are now more Indians in the middle and upper classes than in the lower classes, and each of these new middle-class families saves up for just a gram of gold ($60), then an ounce, then a huge necklace and assorted jewelry that may cost $200,000 or more for an upscale Indian wedding ceremony.

China's middle class is also fueling a huge rise in gold demand. Forbes author Gordon Chang reported last week that China imported 490 tons of gold last year, about twice the gold they imported in 2010. The actual gold transfers from Hong Kong (i.e., China's main conduit to the "outside world") grew by nearly 300% last year, from 3.8 million ounces in 2010 to 13.75 million ounces in 2011. In addition, China is now the world's largest gold producer, so their total consumption of gold is rising exponentially. Perhaps the Chinese central bank is buying part of that gold, but they don't tell the world what they're doing, and they don't like to push the price up by buying lots of gold all at once. More likely, China's rising demand comes from the same sources as India's demand - a rapidly-rising middle class trading paper for gold.

Japan has been richer for a longer time than China or India, but their gold demand is also rising steadily. According to the Tokyo Commodity Exchange (TOCOM), daily open interest (volume) in gold futures contracts has risen by nearly 15% in 2011 over 2010, while silver futures open interest is up 59.5%.

A GLOBAL SUPPLY PINCH ALSO PUSHES GOLD PRICES UP

Gold mining companies have been feeling pressure from protesters, lower grades of ore and rising costs, limiting the supply of new gold on the market. Miners now say that the average cost of getting an ounce of gold out of the ground is about $1,200 an ounce, which may seem to be cost-effective when gold is $1,700, but miners need to lay out millions of dollars in capital to open a mine, and they won't do that without confidence that gold will STAY above $1,700 for years to come. Most miners are skeptical enough, based on the dry spell in prices from 1980 to 2005, to be slow to commit their exploration funds.

The protestors have shut down some Third World mines, but the main threat to gold's supply comes from the ruling class. Venezuela just completed the repatriation of 90% of its overseas gold and South Africa's ruling African National Congress (ANC) has made noises about nationalizing that nation's mining industry. For now, the ANC has proposed a crippling 50% tax on mining resources. This will push South Africa further down the list of gold producers from its current fifth place rank. Until recently, South Africa was the world's largest gold producer. In the 1970s, South Africa produced more than two-thirds of all the world's new gold supply. Now it accounts for only around 7%, so that supply is drying up.

Long-term, rising costs of production mean that new gold supplies will either shrink or remain flat at about 2500 tons of new gold mined each year. As long as the dollar and euro sink, with profligate government spending running up huge deficits, rising gold demand and limited supply could push gold over $2,000 this year and to $2,500 an ounce within five years, according to Greg Robinson, the CEO of Newcrest Mining in Australia, the world's third largest gold producer. Even at those lofty prices, many mining executives worry that the rising cost of gold mining production will make most new mines too expensive to open.

A Religious Conundrum

The White House wanted its contraception, sterilization and abortion ideology to be the law of the land. It also now wants to avoid political backlash, as Catholic Vice President Biden warned, from those who cite concerns about religious freedom rights. When the mandate was finalized in January there was no wiggle room according to quotes from senior administration officials in The Wall Street Journal. Now other senior administration officials contradict those statements. Catholic Bishops and other religious organizations expressed dismay at not being included in the process to date. Balancing women's rights and religious freedom are making for a real conundrum for The White House. We will examine this important issue and its ramifications in more depth next week.

January Gold Rise Energizes Rare Coin Market

With gold prices up almost 10% in January, interest in rare gold coins is rising too. From small "mom and pop" coin shops to national dealers, I hear dealer commenting that "the wind" is now at their backs and not in their faces. One major dealer was lamenting to me that he was having to pay considerably more for many gold coins than what he was selling them for just last month. Open the windows and look outside, flags are flapping and it's getting windy!

Metals Market Report Archive >