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

Metals vs. Markets   September 17, 2012   --- Change vs. January 1 Prices in 2000-05 ---

Last Week In Metals: Gold rose $35 (+2.0%), silver rose $1 (+3.0%), platinum rose $118 (+7.4%) and stocks rose 2%.

Gold shot up $35 per ounce on Thursday, after Ben Bernanke announced a generous and unlimited new form of money creation, dubbed "Quantitative Easing, Round 3" (QE-3). Silver and platinum rose even faster, pushing silver and platinum above all three major U.S. stock market indexes for the year-to-date.

The Fed Chairman said that he would buy $40 billion of mortgage-backed securities each month until the job situation normalized. The Fed will also keep buying Treasury bonds through their "Operation Twist." The Fed's tool kit of expansive monetary policies is now pushing the dollar back down to the euro. The euro, which fell to $1.20 less than two months ago, has now risen back over $1.31 to the dollar. A falling dollar pushes up the price of most commodities in terms of the dollar, thereby amplifying the rise in gold.

Rare gold coin demand dramatically increased this month due to the rising price of gold and European banks suspending gold coin sales. I've had to travel to buy product every week this month!

• Gold 52 weeks ago (September 16, 2011): $1794.00
• Gold's average price during 2012: $1645.09
• Gold's London Low for 2012: $1537 on May 16
• Gold's London High for 2012: $1788 on February 29

"Could Fed Miscalculations Lead to $10,000 Gold?"
(Barron's, September 17, 2012)

The Federal Reserve broke all kinds of historical precedents last week. First, they made a major change in monetary policy just 55 days short of a major national election. Usually, they avoid such pre-election moves in order to appear neutral. Last week's move clearly lifted the stock market and the mood of the nation, helping the incumbent President Barack Obama in the polls. Secondly, the Fed instituted a long series of monetary policies with no end - indefinite easing. The zero-interest-rate policy (ZIRP) will last through at least 2015, but they keep moving that deadline out a year, each year. Also, the $40 billion per month in mortgage-backed security buying will last indefinitely, until the unemployment rate is back to normal, perhaps 5% to 6%. Operation Twist, their plan to depress long-term interest rates, also continues.

Fed Chairman Ben Bernanke added this unprecedented promise in his press conference: "Even after the economy starts to recover more quickly; even after the unemployment rate begins to move down more sizably, we are not going to rush to tighten policy. We [will] make sure the recovery is well established."

This week's edition of Barron's quoted Scott Minerd, chief investment officer of Guggenheim Partners, who said that gold could hit $10,000 per ounce "in extreme circumstances," which (he said) includes the Fed's ongoing "miscalculations regarding inflation." Minerd said that the very-wealthy have already been buying hard assets like gold, adding, "Every portfolio should be partially composed of such assets."

Barron's columnist Jim McTague also quoted Martin Regalia, chief economist for the U.S. Chamber of Commerce, who predicted that a "full jobs recovery will take another five years," meaning that the Fed's current quantitative easing plan would last at least another five years, during which time, "absent serious belt-tightening, America probably would inflate its way out of debt." And that is very bullish for gold.

Gold is Once Again acting as an "Inflation Hedge" and "Crisis Hedge"

Only a few weeks ago, gold was trading under $1600 per ounce. Now, we're flirting with the annual high of $1788, set last February. Gold is rising due to two of its major historical roles, as an "inflation hedge" and a "crisis hedge." The surprise invasion of several North African and Middle Eastern U.S. Embassies last week launched a new international crisis. In response, the President first offered a lukewarm apology for an offensive underground film which nobody had even heard of before last Tuesday. Then, he offered to meet with the new Egyptian President, a devotee of the radical Muslim Brotherhood, while "delaying" to meet with Israel's Prime Minister Benjamin Netanyahu, due to a "busy schedule" (which included an appearance on Letterman and several campaign-related fund-raising events). The President's game plan of bending over backward to seem fair to Islamic extremists is clearly not dissuading the terrorists from further anti-American attacks. As these crises escalate, we can look for gold to rise as a "crisis hedge."

The big national winners in this new round of Mideast violence are Russia and Iran, two nations which have a huge role in fomenting the current unrest in the Middle East. Both nations have stockpiled huge amounts of gold in recent months, and they are now profiting from their gold hoard. The World Gold Council says that Russia has been buying about $500 million worth of gold per month, doubling its gold reserves over the last five years. In addition, Iran is stockpiling gold in exchange for selling its oil to Turkey. Through July 31, 2012, gold exports from Turkey to Iran were five times more than all of 2011.

Inflation is also back on the front-burner. Since many of the violent lands in North Africa and the Middle East are major oil producers, the price of oil is now hovering around $100 per barrel. Energy and food prices are soaring. Last Wednesday, the August Producer Price Index (PPI) was released. The raw price rise was 1.7% in August - a 22% annual rate. That huge gain was heavily influenced by a 6.4% increase in energy prices. The Consumer Price Index (CPI) rose a bit slower, at 0.6%, a 7.4% annual rate, but that included a 5.6% rise in energy prices. In addition, the drought in the grain-growing Midwest will keep food prices rising throughout much of the fall. (The government likes to omit food and energy from the "core" inflation numbers, but those two life essentials are rising faster than any time since June of 2008.)

Since inflation and global tensions are not likely to ease any time soon, gold's current rise could push us up toward $2000 per ounce by the end of 2012. At the very least, gold is well on its way to scoring its 12th straight year of rising prices. Since 2000, gold is up over 500% while the S&P 500 shows no net gain.

Metals Market Report Archive >