The Michael Fuljenz Metals Market Report: March 2012, Week 3 Edition

Gold rose last Monday, but then it fell sharply on Tuesday, when the Federal Reserve came out with two pieces of "good news" for the economy and America's biggest banks: (1) The Fed said that 15 of the 19 biggest banks passed their "stress test," and (2) the Fed said it would maintain its zero interest-rate policy (ZIRP) through at least the end of 2014, despite rising inflation. In addition, the Fed failed to mention any specific plans about quantitative easing (QE-3), which further depressed the price of gold last week.

• Gold 52 weeks ago (March 21, 2011): $1432
• Gold's average price during 2012: $1695.58
• 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 $30, silver dropped $1.60, but platinum gained $22 and stocks rose a little over 2%.

India Demand is down but Set to Rise Again

There is a whole lot of talk about a decline in gold jewelry demand in India, due to a slowing economy and the threat of new import tariffs. Well, you can forget about the first threat, of India slowing down. Last week, India announced that its industrial output accelerated by 6.8% in January (vs. a year earlier).

The proposed new tax on gold imports calls for import duties to rise from the current 2% to a proposed 4%, starting April 1. There are widespread protests this week, so the plan may be scuttled, or postponed, but even if the duty passes, Indians could rush to buy gold in the next two weeks to beat the deadline.

Governments rarely understand that people are endlessly creative when it comes to finding loopholes in laws: "What one many can invent, another man can circumvent." Higher duties on imported gold would merely open up other avenues for investors, including gold ETFs. According to the Association of Mutual Funds in India, the total assets of gold ETFs within India soared 161% in the last year (ending February 29), from 37.44 billion rupees to 97.95 billion rupees ($2 billion). If the 4% gold import tax goes into effect April 1, you can expect more Indians to switch to paper-gold ETFs. That will keep the demand for physical gold going strong, since ETFs are required to buy physical gold to back their shares.

Another possibility is that Indians will keep buying gold, despite the tax. To get a first-hand view of the Indian gold market, Casey Research gold editor Jeff Clark interviewed Ashish and Rashmi Sand, owners of Savio Jewelry in Jaipur, India. These dealers say that gold demand is always high, regardless of price, with more new customers coming each week, due to the rapidly rising middle class in India. "We rarely have customers who sell back their gold or silver...we currently have 90% buyers and 10% sellers."

The same holds true for silver. They said, "If they [customers] cannot afford gold, they switch to silver...silver is also part of gift-giving in India. It is customary to give silver items as a wedding gift, and there are rituals where parents gift silver dinner sets to their daughters at their weddings. In addition to dinner sets, silver is usually found in jewelry, such as a necklace, earring, bracelet, or rings."

The Dangers in Third-World Gold Mining Continue to Rise, Limiting Supply

The "Arab Spring" and "Occupy Wall Street" movements of 2011 have spread to many gold mining camps in Third World countries, where activists and corrupt governments have made gold mining a risky endeavor. Since businesses hate uncertainty and insecurity, there will be fewer and fewer explorations in countries that don't welcome miners. Two more examples hit the news last week, in Peru and Zimbabwe:

In Peru last Wednesday (March 14), at least three protesters were killed and 32 others were wounded in pitched battles between police and "wildcat" miners, according to Reuters. New laws allow governments to seize equipment from "informal" miners. Meanwhile, protestors haunt these miners, saying that they are turning the Amazon rain forest into a toxic desert with polluted rivers running with mercury. Peru is a leading producer of copper, zinc, and silver, and the world's sixth-largest gold producer, so this toxic cocktail of corrupt governments, desperate miners and principled protestors will certainly limit supplies.

Speaking of corrupt governments, Zimbabwe just increased its mining fees by as much as 8,000% in an attempt to stop or seize the most productive mining operations there. The Zimbabwe Chamber of Mines says the government will raise pre-exploration fees by up to $2.5 million and $5 million, on top of "annual ground rentals" ranging from $500 per hectare ($200 per acre) for chrome up to $3,000 per hectare ($1200 per acre) for diamonds. Miners estimate that these hikes in fees could cost miners up to $1 billion. That will likely kill Zimbabwe's golden goose, since over 50% of Zimbabwe's exports come from the mining sector. (Zimbabwe has the largest platinum reserves outside #1 producer South Africa.)

Inflation is Rising, Even if the Federal Reserve Can't See It (Yet)

Last week, the two major monthly inflation indexes came out. Each one showed inflation rising by 0.4% (nearly a 5% annual rate) in February: The Producer Price Index (PPI) rose by 0.4% in February and 3.3% in the past 12 months. The Consumer Price Index (CPI) also rose by 0.4% in February and 2.9% in the last year. The Fed, however, only follows the lower "core" indexes, which ignore energy and food costs.

Unfortunately, our real-world public school cafeterias in Texas can't ignore rising food costs and had to raise the price of school lunches.

Most Americans tend to measure inflation by the price of gasoline at the pump. Due to the most recent rise in gasoline prices, the widely-watched monthly poll by the University of Michigan and Reuters, released last Friday, showed that Americans expect inflation to rise 4% this year, up from 3.3% last month. Oil prices will likely keep rising this year, due to the growing embargo on oil exports from Iran.

With inflation brewing, Treasury bond yields have risen rapidly. Last Wednesday, a 30-year Treasury bond auction pushed yields up 15 basis points (0.15%) to 3.42%, the biggest one-day jump since last October. The 5- and 10-year bond and note yields also rose by 12 to 15 basis points. Clearly, the bond market sees inflation ahead, even if the Fed can't see it, and gold is a historical barometer of inflation.

Some More Bullish Quotes on Gold in 2012

According to a survey at the Bloomberg Link Precious Metals Conference in New York last week, the average projected price for gold at the end of 2012 was $1897 per ounce, an annual gain of over 20%.

Here are some quotes from the analysts at the conference: Rachel Benepe, fund manager at the First Eagle Gold Fund in New York, said: "Gold is the ultimate downside protection...the future is uncertain, and we have no idea how we're going to get through with this situation. That's why we own gold."

Martin Murenbeeld, chief economist at Toronto-based Dundee Wealth, said: "Gold has become an investment, an asset class, and over time, we are only going to be building it up. The central banks are holding gold because they are not sure if the euro will remain five years later."

Michael Pento, president of Pento Portfolio Strategies in New Jersey, correctly predicted the annual high price for gold for the last three years. He forecasts $2150 by the end of 2012, saying, "The only way to protect wealth is to buy gold, because it is probably the only money that is relatively indestructible."

$5 Indians Can Spike Quickly

Many times in history - most recently from 2005 to 2007 - the mint-state $5 Indian has shown the propensity to rise in price very quickly. The $5 Indians I especially like are the elusive San Francisco-minted coins and the 1908-1915 Philadelphia mints. The Philadelphia minted coins are many times rarer than the most-common 1909-D but are available for modest premiums above the 1909-D. Some of these dates now have rarity factors 5-15 times greater than the 1909-D. I and other experts typically recommend buying higher grades for maximum appreciation potential over the long term. The $5 Indian is the rarest coin - the key or "stopper" coin - in the popular four- and eight-coin gold type sets. It is also the only U.S. coin design that was struck incused, with the design elements pushed into the coin instead of raised.

The Indian design has long been considered an important and popular coin design here and in other parts of the world, especially the Far East. When it was originally circulated, some believed that the incuse design could harbor disease in its recesses and complained to the government about health risks. Those complaints disappeared over time, but this story about early medical concerns made $5 Indians a popular coin for doctors and others in the medical profession to collect, further adding to its popularity and demand. For more details, consult my award-winning book, "Indian Gold Coins of the 20th Century."

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