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

Gold and silver rose steadily last week in London, while stocks were falling in the sharpest correction of 2012, so far. Stocks fell on fears of another euro-crisis, this time centered in Spain. As the euro fell in value, the dollar gained strength once again. This pushed gold back down slightly over the last two days, but both the euro and the dollar will likely keep falling to gold, long-term, since both Europe and the U.S. are continuing to attack their slowing economies and rising debt by printing money or creating credit.

Last Week In Metals: Gold rose $35 (+2.2%), silver rose $1.10 (+3.5%) and platinum rose $8 (+0.5%), while stocks fell 2%.

Europe is Entering another Debt Crisis, Sending Gold up Again

In May of 2010 and May of 2011, the euro-zone fell into crisis mode due to the inability of Greece to service its debts. Now, it looks like Spain is in the spotlight. Last month, Spanish banks borrowed 316.3 million euros ($417.5 million), about twice its borrowing level in February or January. With all four of the PIGS (Portugal, Italy, Greece and Spain) now in recession, they are unable to grow their economies out of debt, so Spain must seek the kind of bailout that the solvent nations of Europe created for Greece.

In the short run, another euro-crisis will likely boost the price of gold in euro terms, as Europeans run for the safety of gold. In the longer term, however, the dollar will also decline. The "race to the bottom" will continue, with gold rising in terms of most currencies, as inflation devalues all forms of paper money.

Inflation Numbers Ignore "Reality at the Gas Pump"

Speaking of inflation, the latest monthly inflation indexes came out last week. On Thursday, the Producer Price Index (PPI) came out as "flat," unchanged, in March, due in part to a 2% drop in gasoline prices! How can that possibly be? The next day, the Consumer Price Index (CPI) told us that gasoline prices rose 5.7% in March. Sure enough, if you consult the federal government's official Web site for energy data (www.eia.gov), the national average price for a gallon of gas rose from $3.78 on February 27 to $3.996 on April 2, for a 5.7% gain, so the news of "flat" inflation was based on a phony 2% drop in the price of gasoline in March, due to "seasonal factors." The government seems to be "in denial" about inflation.

Barron's Lead Editorial for April 16 Favors Gold over Stocks

In journalism, they say, "dog bites man" is not news, but "man bites dog" is news. So when a pro-stock journal favors gold, that's news! This week, Barron's editor Alan Abelson's opening column was titled, "A Golden Opportunity." In it, he favorably quoted two Wall Street analysts on gold:

(1) Alan Newman, editor of Stock Market Cross-currents, expects gold to rise to a 5-to-1 ratio with the Dow. That works out to $2000 gold at Dow 10,000, or $2600 gold at Dow 13,000. He doesn't see this happening overnight, but "the fundamentals argue that each dollar printed ensures an increase in value for each ounce of gold."

(2) Darren Pollock, a risk-conscious portfolio manager for Cheviot Value Management in Santa Monica, California, says that central banks "are keenly aware of a time-tested cause and effect: The more debt monetization, the greater the likelihood of lower currency value and higher inflation." The central banks, according to Pollock, are "worried stiff" about shielding their assets from devaluation, so they abandoned their long-term plan of liquidating gold in favor of a new plan to steadily accumulate more gold.

Meanwhile, gold remains in a narrow trading range because so few stock-oriented analysts on Wall Street are buying gold now. In the same day's (Monday's) The Wall Street Journal's, Liam Pleven wrote that since late February, "hedge funds, pension funds and other money managers have slashed by 39% their futures-market wagers that gold will rise. In the same period, they increased by 87% their bets that prices will fall." That means that most of these trend-following wizards are either opting out of the gold market or betting against it via "shorting" mechanisms. In that light, it's positive that gold has held up so well!

The Journal article also quoted research from GFMS that it is "improbable" that central banks "will top their 2011 purchases by much if at all and, as such, the vast bulk of fresh bullion demand will have to come from investors." GFMS estimates that investors will have to buy about 200 tons a month of gold this year (worth about $10 billion) for gold to gain ground from these levels, but that kind of buying is very possible considering the growing demand in India and China, plus any new buying by Wall Street and central banks, when they see the relative stability of gold investments vs. currencies or securities.

In March, America's Federal Debt Rose at a Record Rate

This week, as you recover from the pain of sending your annual or quarterly tax payment to the federal government, try not to think about the "black hole" into which your money has fallen. The federal government reported last week that it spent $369.37 billion in March ($1,190 for every American man, woman and child) and it took in only $170.72 billion ($550 per person) in taxes, for a monthly deficit of nearly $200 billion, a new record in red ink.

This kind of profligate spending cannot go on, yet both political parties accuse the other of "cutting" our favorite programs, like Social Security, or jobless benefits, or military pensions. There seems to be little hope that our government can keep spending in control, causing the dollar to devalue, as time goes by.

Central Bank Gold Buying Trend Continues Upward

After more than two decades of gold-dumping by the world's central banks, in 2007 the tide turned, and the bankers started bulking up the piles of gold in their vaults. According to World Gold Council estimates, central bank net purchases of gold rose 440 tonnes last year, compared to 77 tonnes in 2010, a five-fold increase. China, with the world's largest foreign exchange reserves, holds a miniscule amount of gold in its central bank compared to world averages. China's reported gold reserves are 1,054 tonnes. But analyst Sascha Opel from Orsus Consult expects Beijing to boost its holdings by "several thousand tonnes" over the next five years to match the US stash of 8,000 and the euro zone's 11,000.

NRA Reveals Attorney General Holder's Plan to Change Americans Thoughts about Guns

I just returned from speaking at the National Rifle Association convention in St. Louis, held April 13-15. It was their most well-attended convention ever, with over 500 exhibitors covering 340,000 square feet of exhibit space. We were there as the Official Bullion and Rare Coin Dealer of the NRA. We are also a recognized major donor to the NRA's Eddie Eagle GunSafe® Program. More than 25 million children across the United States have learned how to avoid gun accidents through this award-winning Program.

One of the more popular events of this NRA conference was the showing the video tape of a 1995 speech by the current Attorney General of the United States, Eric Holder, in which he advised leaders in his Party to begin stigmatizing guns, much like society has learned to stigmatize cigarette use over the years. He said that we need to "change the way in which people think about guns." For balance, however, I believe Mr. Holder and some of the media need to report on experiences described in the "Armed Citizen" page of the NRA publications, which show how average people protect their families and businesses legally by the use of firearms.

Gold Coin Prices Have Increased Throughout My Lifetime

I began collecting coins in the 1960s. In 1972, I was president of the Southwest Louisiana Coin Club at age 18 and also chairman of the Louisiana State Numismatic Association Coin Convention. Over the past five decades, I have seen one or two bull markets per decade - exciting times when many gold coins increased 2- to 8-fold over a 2-3 year span. Often times, the high prices in these bull markets exceeded the prices reached in previous bull markets. Patient long-term gold coin collectors like Louis Eliasberg used time to their advantage by building sets of classic gold coins. Eliasberg's gold coin collection, costing less than $400,000, brought about $55 million decades later - more than 100 times what he paid.

I recently reviewed some price charts on Indian gold coins with my staff and showed them that many $5 Indians in MS-62 and MS-63 saw a more than three-fold price increase from 2003 to 2006. In MS-64, they showed more than a three-fold increase from 2001 to 2006. Visualizing these dramatic increases crystallized for them the reason why I have believed in gold coins for almost 50 years. In 1966 at age 12, I won $50 playing Bingo at a club in Lake Arthur, Louisiana with my grandmother. With that money, I bought my first gold coin, a beautiful $5 Indian. I estimate that coin would be worth over 40 times as much today. I bought my first $20 Liberty in 1972, my senior year in High School, for $50. I estimate that coin's current value would be over 40 times what I paid.

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