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

Gold fell below $1700 last Tuesday, staying below $1700 for most of the week, but then it recovered to $1714 Friday afternoon in New York. In early Monday trading, however, gold dipped below $1700 again. Even though the previous "floor" of $1700 didn't hold firm this time, gold is still up 7% for the year-to-date, and the other two precious metals are up 20% in 2012, beating most other investments.

• Gold 52 weeks ago (March 14, 2011): $1422.25
• Gold's average price during 2012: $1698.44
• 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 $20 (1.2%), silver fell $1.34, and platinum fell $40, while stocks were flat.

Gold's Latest Decline is Mostly Due to a Lower GDP Estimate in China!

Sometimes traders use the silliest of excuses to sell, when the real reason is that they just want to take profits and move on to the next exciting "new thing" on the horizon. Those who hold gold in the form of ETFs or futures contracts tend to be "fair weather friends" of gold. Last week, some of these traders sold gold on the announcement by China's central planners that they expect China's economy to grow "only" 7.5% this year, down from their prediction of 8% in previous years. The fact that the Chinese economy is really growing at about 9% to 10% in the last few years seems to be of no consequence. The fact that 21 leading global economists see China growing by 8.5% this year is also ignored. Beijing's downbeat 7.5% GDP prediction moved the markets in many commodities, since China dominates commodities markets.

According to Barclays Capital, China consumes 46% of the world's nickel, 43% of its aluminum and 40% of global copper each year, so when China's Premier Wen Jiabao cut the annual growth target for China to 7.5% last Monday, the London Metal Exchange index for industrial metals fell 4% in two days. Gold and silver followed industrial metals, in sympathy, since China is also a leading gold consumer.

China is not alone. Some of the world's leading resource-based economies have also slowed down in recent months, putting a damper on industrial metal price inflation. Last week, Brazil announced that its annual GDP growth had fallen sharply from 7.5% in 2010 to a merely "average" 2.7% growth in 2011. Also, resource-rich Australia reported that its annualized fourth-quarter GDP rose at only a 2.3% rate.

The good news (for gold investors) in all this news is that the world's central banks will do what they usually do when slowdowns start. They will lower interest rates and print more money! Last week, the Brazilian central bank announced a huge 0.75% cut in its key interest rate high, from double digits (10.5%) down to 9.75%. Then, China's leaders announced that, since China's inflation rate had fallen to a manageable 3.2% annual rate in February - a 20-month low - China was now free to re-inflate and promote higher growth rates again. In China and Brazil, among other fast-growing emerging markets, the mortal fear of decelerating GDP growth sparked central banks to loosen monetary standards once again.

What to Expect from the Fed, Inflation and Gold This Week

Speaking of loose money, the Federal Reserve's influential Federal Open Market Committee (FOMC) meets this week to decide on interest rates and monetary policy, based on a wide variety of economic variables. They could also begin to hint at the next round of "quantitative easing." Last Thursday, The Wall Street Journal reported that the Fed is considering a new bond-buying program by which the Fed would, in effect, print new money in order to buy long-term mortgages or Treasury bonds. The whole world has been wondering when the Fed would start "quantitative easing" again. Well, this could be it!

To most American families, inflation is a cruel and growing reality, even though the leading national inflation indexes don't seem to reflect much of a net price gain, across the board. The lower prices of real estate and consumer electronics offset the ragingly-high price rises in food and fuel. The national average price of a gallon of gas (regular: 87 octane) is now $3.79, up $0.51 from the $3.28 reading on January 1 and up more than double since the $1.83 reading on the day President Obama took the oath of office three years ago. Back then, a 15-gallon fill-up cost about $27, but today it costs around $57. If a family has two wage earners buying one tank per week per vehicle, that's an extra $3,120 per year out of a family budget. Food costs are also rising sharply, so those Americans with a job must cut back on their other essentials, like housing, new cars, clothing, insurance, savings, college plans for children and leisure.

The Consumer Price Index (CPI) for February, released next Friday, should be a wake-up call, but the Fed has ignored real-life family challenges by ignoring food and fuel costs, focusing on "core" inflation. It will be interesting to see if the FOMC admits to the crippling effects of inflation on Americans this week. (Historically, gold has been an inflation "hedge," so it should rise along with the rising rate of inflation.)

Gold Traders Most Bullish in Four Months

After last week's smash-down, gold has been waffling around the $1,700 mark, plus or minus a few bucks, as steam builds pressure to chug the next leg up. It may come next week.

Gold traders are reported by Bloomberg to be the most bullish in four months and hedge funds raised gold bets to a five-month high. Sixteen of 23 analysts (70%) surveyed by Bloomberg expect prices to gain next week. This is the highest proportion of bulls since November.

Investors chimed in with a bullish voice, too, as they increased holdings in exchange-traded products for seven straight weeks and now hold 2,407 metric tonnes of gold worth $131 billion.

"Record-high ETP holdings show both institutional demand and hedge-fund demand is robust," said Mark O'Byrne, executive director of Dublin-based GoldCore. "People are concerned about inflationary implications of quantitative easing, zero-percent interest rates policy, and global currency debasement."

Singapore to Scrap Gold Tax

In a bid to capitalize on the global gold bullish sentiment, Singapore hopes to lure gold bullion refiners by scrapping taxes on gold, according to a report in The Indian Express. The action may also attract trading houses to open storage facilities and establish Singapore as a major Asian pricing hub for gold, according to industry sources.

Singapore will exempt investment-grade gold and other precious metals from a 7% goods and services tax to spur the development of gold trading, Finance Minister Tharman Shanmugaratnam announced. The change takes effect in October and may lift demand for gold bars and coins. Even with the tax, Singapore's investment gold demand nearly tripled to 3.5 tonnes in 2011, according to consultancy firm GFMS.

Mid-March Madness in Gold Coin History

On March 17, 1862, the U.S. Treasury sanctioned two issues of Greenbacks, not tied to any form of metallic backing. The Civil War caused Lincoln (and the Confederacy) to print more money than they could back with gold or silver, resulting in runaway inflation, in both north and south, by war's end.

On March 14, 1900, the U.S. officially went back on the gold standard. Using a new gold pen, President William McKinley signed the Gold Standard Act, solidifying the single-metallic standard for money, as opposed to the Democratic challenger William Jennings Bryan's favored bi-metallic standard. In these days of easy money, it's hard to believe that the main campaign debate in 1896 and 1900 was over Gold!

San Francisco $5 and $10 Indians Heating Up!

A leading California-based gold coin dealer flew in to consult with me last week. He noted the difficulty he was having in getting enough high-quality gold coins for his customers. He bemoaned the fact that Brilliant Uncirculated San Francisco Mint $5 and $10 Indians were harder to come by and costing him more. He also confirmed my comments in previous metals market reports about the difficultly in locating high-grade Type II $20 Liberties and Carson City Double Eagles!

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