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

Gold and other commodities are down, partly because the U.S. dollar is UP to the euro. In the last two weeks, the euro has fallen from $1.324 to $1.288, mostly in reaction to the recent elections in France and Greece, which have put an end to the "age of austerity" in Europe and the beginning of a new era of monetary expansion in the euro-zone. By contrast, the U.S. had a positive April - the first monthly budget surplus since 2008. The U.S. economy is growing slowly, but fast enough to give the dollar a quick boost.

• Gold 52 weeks ago (May 13, 2011): $1505.75
• Gold's average price during 2012: $1675.91
• Gold's London Low for 2012: $1583 on May 11
• Gold's London High for 2012: $1788 on February 29

Last Week In Metals: Gold fell $60 (-3.7%), silver fell $1.32 (-4.4%) and platinum fell $64 (-4.2%), while stocks fell 1.2%.

Rising Demand for $10 Indian Gold Coins Should Boost Prices Soon

I just learned about a very large purchase of better-date high-mint-state $10 Indian gold coins by a major company. This is one of many companies that have shown interest in the $10 gold Indians, which were designed by the same sculptor that designed the $20 Saint-Gaudens Double Eagle. Over 100 years ago, U.S. President Theodore Roosevelt chartered the aging dean of American sculptors, Augustus Saint-Gaudens, to design these two elegant U.S. gold coins, the $10 Indian and $20 Double Eagle. As author of the leading reference work on the Indian series of gold coins, I am aware when other companies order multiple copies of my book, presumably to help promote sales of these classic gold coins containing almost a half-ounce of gold. We also know from past experience that a buying frenzy in these $10 Indians is good for the overall gold coin market as investors matriculate from the Indians to buy other series of classic gold coins.

Greece is Falling Apart - Dooming the European Union and the Euro

Even though Greece has been falling apart for two years, the situation always seemed to be "in control," because the adults were in charge of prescribing needed discipline ("austerity," in the form of draconian budget cuts). The latest Greek elections changed all that. While the victory of socialism in France was widely expected, nobody expected Greek voters to throw out both of the leading political parties. That's like U.S. voters throwing out both the Republicans and Democrats in favor of some "fringe" political parties. Most Greek voters are frankly spoiled by their cradle-to-grave welfare state and underground economy, so they don't care if the IMF or Germany sends them any more money. They want out!

This will eventually cause the 27-nation European Union to break up, or at least reduce its membership one nation at a time, causing the euro to break up as a currency, with perhaps a "northern euro" run by Germany (like the old German mark), vs. weak southern European currencies, like the old Italian lira and Greek drachma. Breaking up can be peaceful, like when Czechoslovakia split in two, or it could lead to violence, as in the U.S. Civil War, but more than likely we'll see something in between, such as public riots over the inevitable drying up of unemployment pay and retirement benefits. This could cause the dollar to rise further to the euro, but over time almost ALL paper currencies will fall in value, pushing gold up.

Is Buffett Anti-Gold? That Depends on Which Buffett You Ask

The financial news channels were abuzz last week about the disparaging comments Warren Buffett made about gold. Buffett said gold has limited industrial demand and "will remain lifeless forever." His partner Charlie Munger said, "gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939, but civilized people don't buy gold, they invest in productive businesses." In 2010, Munger was even more insulting: "I don't see how you become rational hoarding gold; even if it works, you're a jerk."

Perhaps Buffett and Munger are tired of people pointing to the superior performance of gold and silver over their stock, Berkshire Hathaway. Starting in January 1, 2000, Buffett's Berkshire Hathaway stock has more than doubled, rising 120%, but gold is up 446% and silver is up 435% in the same time span.

Buffett's parents were more respectful toward gold. Buffett's father, Congressman Howard Buffett, was the Ron Paul of his day. He wrote an essay in support of a gold standard, called "Human Freedom Rests on Gold Redeemable Money." He wrote: "At first glance, it would seem that money belongs to the world of economics, and human freedom belongs to the political sphere. But when you recall that one of the first moves of Lenin, Mussolini and Hitler was to outlaw individual ownership of gold, you begin to sense that there may be some connection between money, redeemable in gold, and the rare prize of human liberty."

Howard Buffett continues: "Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing-press paper money." To the elder Buffett, that underscored "the possibility of a relationship between a gold-backed money and human freedom."

Leila Buffett, Warren Buffett's mother, once said that her husband, Congressman Howard Buffett, only considered one issue when he decided whether or not to vote for a bill: "Will this add to, or subtract from, human liberty?" The freedom to own gold clearly adds to personal liberty, while the prohibition of gold ownership limits our freedom, allowing government to be the sole arbiter of what we must use for money.

The Gold Standard Worked Far Better Than the Current "Fiat Money" Era

Most mainstream economists say that it would be impossible to return to a gold standard, but what we have seen in Europe and Asia may teach billions of average people that governments can rob them of their chance to acquire wealth by prohibiting gold ownership or forcing them to use depreciated paper assets. As the world witnesses most major world currencies "race to the bottom" in upcoming years, the public will gradually demand some kind of gold or commodity standard to back up their paper currencies.

Nearly all academic economists today say that the gold standard "didn't work," that it put nations in a "strait jacket" and led to greater and deeper depressions. But a December 2011 report by the Bank of England showed that the world grew much faster under the Bretton Woods (gold exchange) standard, in force from 1945 to 1972, than it did in the 40 years since then. From 1945 to 1972, nations grew the fastest of any period in the past 150 years. Inflation was far lower from 1948 to 1972 than it has been in the last 40 years. For instance, gold was worth a stable $35 from 1934 to 1971, but since Nixon closed the gold window in 1971, gold is up 45-fold. That means the dollar is down 97.8% since 1971.

Ron Paul is not alone in calling for a gold standard in the 21st Century. Lewis Lehrman, a financier and founder of the Gilder-Lehrman Institute, recently published a plan to create "The True Gold Standard." In addition, Charles Kadlec, another former Wall Streeter, co-wrote his own proposal, "The 21st Century Gold Standard," with Ralph Benko. The case for gold as a mandatory backing of Federal Reserve notes is part of new legislation offered by Congressman Kevin Brady, who (like Ron Paul) is another Republican from Texas. Dozens of state legislatures are introducing their own gold- or silver-related currency bills.

The gold standard may return. The over-spending of governments virtually guarantees the return of gold. If that happened, the price of gold would most likely rise to $8,000 or more, but a pure gold standard is probably too radical for politicians to accept. If the public demands honest money in the future, politicians may be forced to use a "basket" of commodities, with gold and silver playing the primary role. In that case, you could expect at least a doubling, to $3500 or more, just to back up the currency in circulation.

Gold Demand in India and China Rising

A big damper on the gold price has been the rising cost of the metal in India, due to a weak rupee and the threatened excise tax. Buyers in India tend to be cost conscious, but with the recent decline in gold's price and the elimination of the controversial gold excise tax in India, demand there may escalate soon.

India is still the #1 gold buyer in the world, but China is knocking on the door to become the new #1. China's imports of gold via their international banking province (semi-independent Hong Kong) rose over 500% in the first quarter (year over year), while rising 59% (month over month) from February to March.

Lian Ruian, director at Pinpoint Investment Consulting Ltd. in Beijing, said that Chinese gold buying in this season of traditionally low demand "represents the resilient nature of China's gold consumption." Nick Trevethan, senior commodities strategist at Australia & New Zealand Banking Group Ltd., said this new demand is "largely related to price" but "negative real interest rates should keep demand strong."*

*A "negative real interest rate" means that inflation is higher than short-term interest rates, giving savers a net real loss, while gold has the potential to return 10% or more per year, based on the last 12-year track record of gold.

Metals Market Report Archive >