February 2012, Week 1 Edition (Published by Texas Coin Company Universal Coin, an Award-Winning Gold and Rare Coins Dealer)
Gold Surpassed $1750 last Thursday before retreating on Friday. The most-active (April) gold futures contract ended the week at $1740, up 0.5% for the week. March silver settled at $33.75, down a bare 0.1% for the week. Friday's gold decline was blamed on a surprisingly strong U.S. jobs report: America added 257,000 new private-sector jobs in January, lowering the jobless rate to 8.3%. This shouldn't cause gold to fall, but the pundits generally expect gold to fall in good economic times, since investors generally turn to stocks during good economic times. As a result, stocks rose 1.5% on Friday, while gold corrected.
- Gold 52 weeks ago (February 7, 2011): $1347.50
- Gold's average price during 2012: $1666.81
- Gold's London Low for 2012: $1590 on January 3
- Gold's London High for 2012: $1751 on February 2
Last Week In Metals: Silver and platinum gained 1.4%, while the Dow gained 1.1%, mostly due to a positive jobs report.
Silver and Platinum are the Stars of 2012 – So Far
Silver and platinum continue to rise at almost twice the pace of gold in 2012. Both of those metals are tied more toward industrial growth than gold is, so the positive jobs report helped lift silver and platinum.
The platinum group metals (PGMs) are mostly linked to demand for catalytic converters in automobiles, so the global economic recovery and the resurrection of Government Motors (GM) have helped platinum. It also helps that the main source of PGMs is South Africa, which is in the process of rewarding its labor pool a higher share of the profits from the rising price of the metals that they so laboriously unearth. So far this year, labor difficulties at South African mines have kept supplies low and prices high in 2012.
Silver is the biggest gainer so far this year. Last week, the U.S. Mint reported sales of 6,107,000 ounces of silver coins in January, second only to the 6,422,000 ounces sold in January, 2011. Those 200 tons of silver coins sold in January 2011 marked the beginning of silver's strongest 3-month surge since 1980.
Last year at around this time, silver began rising from $26.68 on January 28 to $48.70 on April 28, a gain of 83% in three months. While that meteoric rise is unlikely to happen again, it's important to realize that silver is now trading at a much higher level than it enjoyed last year at this time. Silver has been trading over $33 per ounce since January 26.
Gold is still waiting for Last Summer's "Gold Fever" to Resume
Gold peaked last September 5 at over $1920 per ounce before dropping to $1520. At prices above $1720, we're more than halfway back to the bull market peak, but gold has not yet resumed the kind of "gold fever" that drove prices so high last August and early September. Perhaps we've seen the beginning of the next bull move already. Gold coin sales were strong at the U.S. Mint last month, with 127,000 ounces sold in January, the most in any month since the 133,500 ounces sold by the U.S. Mint in January, 2011.
The important thing to remember about Mint sales is that these coins are now held by "strong hands," not by day-traders or speculators.
Stocks set a multi-month high last Friday. Tech stocks, as represented by NASDAQ, are at an 11-year high. Apple has been the superstar of tech stocks in the last year, but now the new initial public offering (IPO) for Facebook is causing speculative money to soar into tech stocks once again. Since most paper investors are buying stocks now, gold seems to be "treading water" lately, but when this new crop of "glamour" stocks (like Apple or Facebook) reach their inevitable peak, speculators may return to gold.
Low Interest Rates Create a "Level Playing Field" for Gold vs. Paper
The Fed is Our Friend! When Ben Bernanke speaks gold often rises. By promising to keep short-term interest rates low (near zero) until at least the end of 2014, the Fed is creating a "level playing field" between paper money and gold. The rap against gold is that it doesn't provide income. These days, neither does cash. When we ignore income, the match between gold and paper is something like a Super Bowl pairing of any NFL team vs. Tulane's college football team – a mismatch. The Fed has expanded money supply at unprecedented rates in the last few years, including a doubling of liquidity (available cash) in a single three-month period of late 2008. Gold, meanwhile, only expands by about 2% a year, giving gold a natural advantage over printing-press paper.
Fed Chairman Ben Bernanke has promised to keep interest rates super-low from 2008 to 2014 for some very good reasons. The Fed's primary responsibility is to protect the U.S. banking system from collapse. Since so many banks are underwater on so many home loans, the Fed must keep rates low so that banks don't collapse from mortgage loan loss exposure. Secondly, and even more importantly, the Fed wants to reduce the interest-rate burden of servicing our $15.3 trillion in debt. At 2% average interest rates, service on the current debt is $306 billion per year. If rates reached 5% by 2014 and the budget deficit reached $20 trillion, then the annual debt service would exceed $1 trillion per year – money down the drain.
This is why Bernanke warned Congress last Thursday that a sudden financial crisis was possible unless Washington comes to grips with the budget deficit...quickly! Bernanke told the House Budget Committee that "although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point." Amen!
The War between Gold and Paper in U.S. History during the First Week of February
On February 7, 1870, the Supreme Court ruled (in a narrow 5-3 vote in the case of Hepburn v. Griswold) that the Legal Tender Acts (authorizing paper money during the Civil War) were unconstitutional. Paper money was repudiated. A visibly miffed President Ulysses S. Grant used his executive power to reinstate the Legal Tender Acts and then appointed two cronies (Joseph P. Bradley and William Strong) to the Court. With the balance of opinion duly tilted, the Supreme Court upheld the Legal Tender Acts in 1871.
On February 5, 1934, the Dow rose to 110.74, in the first flush of approval over President Roosevelt's revaluation of the gold price from $20.67 to $35.00 on January 30. The stock market was up 121% in the first 11 months of FDR's 12-year reign, but then the Dow fell by over 20% to 85 in less than six months.
Eight years later, in 1942, the Dow was still under 100. It seems that the New Deal was no solution after all. If you look at the entirety of the 1930s, gold did better than stocks and gold mining stocks performed better than all other stock market sectors. As much as FDR tried to kill gold, gold beat paper once again.
January Gold Rise Energizes Rare Coin Market
With gold prices up almost 10% in January, interest in rare gold coins is rising too. From small "mom and pop" coin shops to national dealers, I hear dealer commenting that "the wind" is now at their backs and not in their faces.
One major dealer was lamenting to me that he was having to pay considerably more for many gold coins than what he was selling them for just last month.
Open the windows and look outside, flags are flapping and it's getting windy!
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