The Michael Fuljenz Metals Market Report: March 2012, Week 1 Edition

Gold suffered a terrible collapse in just one hour last Wednesday morning (see details, below), but gold is recovering after testing its $1700 floor - for the time being. Silver fell 36-cents (-1.0%) and platinum fell $10 (-0.6%). Part of gold's decline is due to a dollar rally, but one clue to the strength of the precious metals market is that silver and platinum only fell slightly last week and both are up 23%+ year-to-date.

• Gold 52 weeks ago (March 6, 2011): $1437.60
• Gold's average price during 2012: $1699.88
• Gold's London Low for 2012: $1590 on January 3
• Gold's London High for 2012: $1788 on February 29

Last Week In Metals: Gold fell sharply (-$71), while silver and platinum fell by 1% or less, and the Dow was virtually flat.

The Battle of Leap Year Day: Why Gold Fell by $100 in 24 Hours

Last Wednesday's gold chart looks like a sharp cliff - like El Capitan in Yosemite National Park. Shortly after 10:00 am on Leap Year Day, gold fell from the $1780s to $1700 and then dipped down to $1685 in overnight trading. The London morning setting last Wednesday was $1788, so gold officially closed the month of February on a positive note in London - but gold fell sharply in New York! What happened?

This is a drama worthy of a made-for-TV movie. In the midst of a close Republican Party Presidential race, Congressman Ron Paul flew in from his campaign in the Washington State caucus to be in front of the television cameras on Capitol Hill on Leap Year Day in order to tell Fed Chairman Ben Bernanke that he has "destroyed the value of real money" during his six years in office. Congressman Paul was allotted about five minutes, of which four minutes was composed of Ron Paul lecturing Mr. Bernanke on the role of gold and silver as money. Ron Paul said that inflation was more likely 9% than the official 2% rate the Fed publishes. Congressman Paul then held up a 1-ounce silver coin and said that an ounce of silver could have bought four gallons of gasoline in 2006, but today, "a silver ounce will buy almost 11 gallons."

Congressman Paul then lectured the Chairman on gold's role as money, saying "The market has always said that gold should be money. Money comes into effect in a natural way, not by edicts or by fiat or by governments declaring it is money." He then proposed to Chairman Bernanke that gold and silver should be regarded as official money (legal tender), so that gold would not be subject to taxes or other penalties.

Chairman Bernanke was brief in his response, beginning by saying, "It's nice to see you, Congressman Paul." Then he said that anyone can buy gold or silver any time they want (not acknowledging the role of gold as legal tender, rather than an investment choice). Then, the microphone was passed to other people and Ron Paul returned to the "other Washington," where he came in #2 in the Washington State caucus.

What Happened to Gold after Ron Paul and Ben Bernanke Sparred?

During Chairman Bernanke's prepared presentation to Congress, he gave no indication of any future "quantitative easing" (i.e., printing more money). Many investors had been hoping for such a declaration, so Bernanke's silence on the subject seemingly "spooked" the bond market. According to the next day's Wall Street Journal, "an unusually big sale of more than 100,000 futures on U.S. government debt cascaded across traders' screens shortly after 10:00 am." Selling then "spread to the cash markets," which pushed the 10-year Treasury yields up from 1.93% to 1.99% "in minutes." The Journal blamed the panic on Mr. Bernanke's failure to speak enthusiastically about some form of future "quantitative easing."

Then, just a few minutes later, at 10:48 am, gold collapsed. The Journal reported that "a flurry of big sell orders came in. Almost 11,000 gold contracts worth $1.8 billion changed hands in about one minute." Silver fell from $37.50 to $34.00.

There is no explaining the psychology of speculators, but the fact that such huge amounts of gold futures were sold in "about a minute" could mean that some speculators feared that rates would rise and gold would lose its advantage of competing against cash on an "equal playing field" of low-income returns. The huge gold sale could have been a pre-meditated move to push prices rapidly down, in order to buy gold below $1700. No one seems to be sure, but we do know that Asian buying picked up sharply below $1700.

Bernanke Apparently Won the Congressional "Slam Down" Last Week - What's Next?

Like him or hate him, Mr. Bernanke's Federal Reserve is not our major financial enemy these days. The chronic over-spending Congress is the major threat to the U.S. dollar and America's economic health. So, instead of letting himself continue to be lectured by the very body that has created our burgeoning federal deficit, Mr. Bernanke turned the tables on Congress last Wednesday by lecturing them about their own brand of fiscal irresponsibility. He reminded them that "On January 1, 2013, there's going to be a massive fiscal cliff of large spending cuts and tax increases." He advised Congress to "figure out ways to achieve the same long-run fiscal improvement without having it all happen on one day." Heal thyself, Congress!

In the longer run, both the Fed and Congress are equally to blame for lacking any discipline for spending or money creation. Next year, the Federal Reserve "celebrates" its first Century (born in 1913). It's undeniable that the Fed has helped destroy almost 99% of the U.S. dollar's value in the last century. In 1913, gold cost only $20.67 per ounce. Now, it's over $1700, an increase of about 8,200%.

There will always be some sharp declines and recoveries in the gold market, but the fact remains that gold has risen for 11 years in a row, and 2012 is still a net-positive year for gold. The dollar may be up from one day to the next, but the long-term trend is that the dollar has been down for the last 12 years and over the last century. Remarkably, the dollar has been one of the few currencies to survive the 20th century with some remnant of its 1900 value. Most countries have repudiated their paper promises over the last century. Those few that survive (like the Swiss franc and the U.S. dollar) run a distant second to gold.

Why Platinum is Soaring: Limited South African Supply & Rising Asian Demand

One cause of platinum's recent rise is a protracted mining strike in South Africa. Impala Platinum Holdings of South Africa (which produces 25% of the world's platinum) warned its customers that deliveries could be cut in half by April, due to a strike at their largest platinum mine at Rustenberg.

On the demand side, platinum jewelry is popular in China whenever it trades at a lower price than gold. Historically, platinum has been more expensive than gold, but for most of the last six months, platinum has sold at a discount to gold, prompting higher demand in cost-conscious China and India. According to the World Gold Council, gold jewelry demand fell 3% in 2011, while platinum jewelry demand climbed 1.8%. China accounts for about 68% of global platinum demand, and platinum demand is rising in India.)

Type II $20 Liberties (with "In God We Trust") are Becoming Harder to Find

Type II $20 Liberty Double Eagle gold coins have become harder to locate in recent months. These historic $20 Liberty gold coins were struck from 1866 to 1876 and were the first $20 Liberty gold coins to contain the motto "In God We Trust" on them. They are very difficult to find now, especially the Carson City and early Philadelphia examples. Choice uncirculated coins are especially elusive, but prices for most Type II $20s graded choice almost uncirculated or higher by PCGS or NGC have also been trending upwards for most of this century and I expect them to continue to do so. (To read my complete story on how "In God We Trust" got on our money and how politicians have fought over that simple phrase for 150 years, see: www.InGodWeTrustOnMoney.com.)

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