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

Gold rose six days in a row last week - its best multi-day winning streak since last August - based on the likelihood of further monetary easing in both Europe and America. Going into the Greek elections last weekend, Mario Draghi, the President of the European Central Bank (ECB), said that the ECB was standing by, willing to add liquidity to European banks if Sunday's Greek elections created new market turmoil. Then, on Sunday, the "pro-bailout" forces won in Greece and gold dipped briefly overnight before recovering all its losses Monday morning. Meanwhile, the U.S. recently reported a long series of deflationary indicators, which will give the Federal Reserve all the ammunition it needs to consider some more monetary easing measures at its Federal Open Market Committee (FOMC) meetings this week.

• Gold 52 weeks ago (June 20, 2011): $1544.00
• Gold's average price during 2012: $1647.02
• Gold's London Low for 2012: $1537 on May 16
• Gold's London High for 2012: $1788 on February 29

Last Week In Metals: Gold rose $32 (+2%), silver rose $0.21 (+0.7%), platinum gained $53 (+3.7%) and stocks gained 1.3%.

Seven Signs That Gold Coin Demand Is Growing

1. Large dealers are receiving more large orders this month than in any month in 2012.
2. Large dealers are reporting more large orders coming from buyers they haven't heard from in years.
3. National radio network ads for rare gold coins are increasing, especially for $10 Indians.
4. Dealers are reporting several large orders for $10 Indians, some totaling over $1,000,000 in one month.
5. Newspaper and magazine ads for gold coins are increasing.
6. The numismatic premiums over gold "melt" value are expanding for most common pre-1933 gold coins, like the 1904 $20 Liberties.
7. My 2010 Numismatic Literary Guild Best Investment Book of the Year, "Indian Gold Coins of the 20th Century," has been selling well enough that I need to reprint the book. The new edition will be out as soon as possible. New books, or reprints of recent award-winning books, typically spur new demand for the coins in question.

Gold Often Rises during Bouts of "Deflation" - Like This, Because the Fed Will Likely Respond with Inflationary Policies

Gold is called an "inflation hedge," but gold can also rise during times of "deflation," because of what the Fed is likely to do in such a situation - find a new way to print money or ease liquidity. When the Fed meets this week (Tuesday and Wednesday), they will likely discuss QE-3 or some other form of stimulus to attack the sudden spurt of deflationary statistics released in the last few days: (1) The Producer Price Index fell 1% in May, mostly due to a decline in wholesale gasoline prices; (2) The Consumer Price Index fell 0.3% in May and (3) all the other recent indicators reflected a slowing economy, including declining retail sales, rising new jobless claims, an expanding trade deficit, falling industrial production and a sharp drop in consumer sentiment. This gives the Fed plenty of reasons for easing monetary policy this week.

Why did prices decline in May? The big reason is the decline in the price of oil, which was (in turn) caused by the decline of the dollar, which was caused by the collapse of the euro. This is probably a temporary and artificial decline of prices, due to overseas turmoil in Europe. When the dollar rises, commodities tend to fall in price, since they are universally quoted in U.S. dollar terms. This makes gold's recent rise all the more impressive. Gold is fighting against the "grain" of declining oil, grains and base metal prices.

Consumer Price Indexes Don't Report our Real "Cost of Living" Accurately

I must also add that the Consumer Price Index is inaccurate when it comes to measuring the daily "cost of living" of the average American family. Housing equivalents make up more than 30% of the index, and the five-year-long decline in housing values warps the Consumer Price Index. After all, people don't sell their homes every day (or year), and the drop in the price of their home detracts from their net worth and makes them feel trapped in their homes. Selling a home at a loss doesn't lower anyone's "cost of living."

Due primarily to the lower prices of family homes over the last five years, the median family's net worth (i.e., their assets minus liabilities) fell by 38.8%, from $126,400 in 2007 to $77,300 in 2010. Nearly all of that decline is due to the paper loss in property values, plus a net decline in stocks, as well. But during that time, gold rose strongly in price, and was an asset class that well protected the wealth of American families.

Gold is rising because investors are looking for a place of safety. European banks are failing or are being downgraded by major agencies, pushing a lot of European cash into America, strengthening the dollar. When that "flight capital" comes to America, they find that there is virtually no interest income in banks. By contrast, gold is rising in price and offers more safety than any form of paper money in bank savings.

Six More Reasons why Gold is Rising Again

Last week, we printed this brief six-point list of recent reasons why gold is beginning to recover:

The positive factors we've seen arise lately include: (1) fear over the breakup of Europe and the euro, (2) more central bank gold buying, (3) low interest rates, giving gold a "level playing field," (4) slow growth in newly-mined gold, (5) new buying on dips from "big-name" buyers and (6) rising demand in China.

Now, we see another six-point list drafted by Eric Sprott and analyst Shree Kargutkar. None of these stories is new to us. We have reported on all of these trends in recent weeks, but, with due credit to the source, we review their list here, since it helps us understand the global view of gold better:

1. Chinese gold imports from Hong Kong in April surged almost 1,300% year-on-year. Total gross imports for April were 103.6 tons and the net imports were 66.3 tons. This spurt of gold imports looks like an acceleration of the already stunning rise in gold imports to China over the past two years. Imports from May of last year to April of this year jumped 640% over the same period from 2010 to 2011.
2. Globally, central banks bought over 70 tons of gold in April, with the Philippines, Turkey, Mexico, and Sri Lanka being significant buyers of gold, according to International Monetary Fund (IMF) figures.
3. Iran purchased $1.2 billion worth of gold in April through Turkey. As the developed nations continue devaluing their currency at the expense of developing nations, countries such as Iran, China and Mexico are forced to look at alternative stores of value.
4. After 20 years of lackluster returns and stagnant bond yields, Japanese pension funds have finally discovered the value of investing in gold. The $500 million Okayama Metal and Machinery pension fund placed 1.5% of its assets into gold bullion-backed ETFs in April in order to "escape sovereign risk".
5. Lower quality and lower yields of bonds from once-solid AAA-rated countries have fallen into disfavor as one after the other of these "safe" countries have had their debt downgraded. Bond king Bill Gross said, "As they (investors) question the value of much of the $200 trillion which comprises our current system, they move marginally elsewhere - to real assets such as land, gold and tangible things, or to cash and a figurative mattress, where at least their money is readily accessible."
6. After a period of sharp declines, gold mining stocks are perking up. The Gold Mining ETF (GDX) has seen strong inflows in the past three months, gaining about $1.2 billion from March to May. The HUI, which is the Gold Bugs Index, is now up over 20% from its lows since May 16th, 2012.

Sprott and Kargutkar concluded: "We believe there has been a material change in the gold investing landscape…When demand outstrips supply, prices move higher. These significant macro changes in the supply/demand dynamic of the gold market should propel the price of gold to new highs."

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