Rust Rare Coin, Inc. February, 2008

PRICE TRENDS

IN OUR OPINION. . . .

Well, 2008 has certainly started off with a bang! Gold has gone up almost $100 in the past month; silver is up almost $2; and platinum is up almost $200. Most of this movement has been caused by the lack of confidence in the dollar. The Fed has even lowered the interest rates over a full point in the last week with talks of more cuts to come. It is blatantly evident that diversifying in precious metals has been a great way to maintain one’s buying power.

As we look at the market fundamentals, everything looks to be strong throughout the coming months and probably through the end of this year. We are looking for a bit of a pull-back, especially in gold and silver as strong upward moves generally are followed by profit-taking.

Platinum is in a real squeeze right now because of the power shortages that have occurred and are still very possible in South Africa. That has had, and could continue to have, a huge effect on production, especially in the near term. Once those power issues have been resolved, platinum should come back down to trade in its normal range.

This issue contains some information on “dehedging” by mining companies. We would like to briefly explain that practice. “Hedging” is the ability to sell product forward for the current price. If the metals markets are in a downward trend it is good business policy to hedge; you make current money for a product that you may not mine for several years. You deliver your product as it is mined through the years for the higher price it was originally sold for.

However, in a rising market mining companies need to reverse that position—or “dehedge.” Hedge books can have contracts with banks for several years. When metals are in a bull market, the mining companies are losing on the products they have hedged. They actually have to buy their product position back before they can sell their product at the higher current market price. This becomes particularly costly if production costs are rising as well.

As mines try to reverse their position they “close out” their hedge books; but while those products are hedged, they are not available in the market, and the market is tighter.

Precious metals have enjoyed a bull market over the past few years. Each of those years has had at least one “profit-taking” period. We would recommend that you look for those dips which are certain to occur to add to your portfolio.

MARKET FOCUS, EMERGING TRENDS

James Steel, Analyst, HSBC Global Research

The dominant factor in the precious metals markets recently has been the interruption in power supplies to industrial users in South Africa, resulting in the suspension of all mining activity. Platinum prices will, in our view, remain highly vulnerable to the vagaries of power generation in South Africa. Fortunately, we believe there is unlikely to be any long term damage done to the mines from the power stoppages. Eskom (the state utility company) guaranteed enough electricity for essential maintenance, such as pumping, ventilation, and refrigeration. However, problems may not end even after this initial ‘crisis’ period is over. South Africa appears to be chronically short of power given its residential and industrial demand. Power shortages were already evident well before the current crisis. It may, by Eskom’s own admission, take many months, even years, to guarantee sufficient power will be produced with a comfortable reserve margin.

Production at South African mines was restored on 30 January. Eskom will increase the electricity supply to mines to as much as 90% by the end of the week, and it has already increased power supplies to 80% for most mines. Eskom has asked industrial users, including the mines, to reduce their electricity consumption by 10% and warned that it will begin rationing supplies to all its customers in March. The precise loss in mine output and its impact on production due to power reductions this year are impossible to tell exactly, but clearly production will be less than optimal, as mining is highly energy intensive. The mine operators themselves have stated that any reduction in the power supply, however slight, is likely to clip production.

The fact that platinum prices pushed to new highs, even after Anglo Platinum reported it was still mining at full capacity despite receiving only 80% of normal power supplies, is a sign that there remains deep underlying concern over the future of mine output. This, in turn, implies that even despite high prices, the market has the potential to trade higher. Eskom continues to warn that although power supplies have been largely restored to the mines, they can be withdrawn should circumstances dictate. Eskom reiterated

the warning that industrial consumers will have to accept some form of rationing.

The strength in platinum helped rally silver, we believe, which topped USD17.00/oz, a new high for the current rally.

Meanwhile, other developments are supportive of gold prices. According to Dominique Strauss-Kahn, the managing director of the International Monetary Fund., in a statement from the world economic forum at Davos, Switzerland, the intensifying credit crunch is so severe that lower interest rates alone will not be enough to jump-start the world economy. He encouraged wider use of fiscal stimulus in the US and elsewhere, to combat economic weakness. The IMF admitted this was something of a turnaround from previous policy statements in which it recommended higher levels of fiscal probity [virtue or integrity]. It is also gold-friendly, in our view, as it signals the seriousness of the world economic situation; this may trigger further safe haven buying of bullion.

Gold and the other precious metals continued to trade higher in the aftermath of the Federal Reserves’ 50 basis point cut in fed funds. Gold was boosted, we believe, by an increase in inflationary pressures, as reported by recently released US economic data. US employment costs rose 0.8% for Q4 2007 compared to Q4 2006, and while personal spending in December edged up only 0.2% compared to the same month in 2006, the personal consumption expenditure price index – a key measure of inflation – rose 0.2%. The core annualized US consumer price inflation rate, excluding food and energy prices, rose 2.2%, a sign of persistent inflation while the economy slows. Furthermore, the core CPI is above the Fed’s upper target range for inflation.

Comments from a Swiss National Bank board member hold potential ramifications for gold, we believe. Thomas Jordan said he saw an increasing risk that the US subprime crisis could spread to other credit segments, which could threaten to destabilize financial markets further. He also pointed out that other segments of the credit market that could be hit include credit cards and auto loans. Should the wider credit markets become even more negatively impacted by the subprime mortgage crisis than they already are, the potential for gold to go higher will also increase, we believe.

Interestingly, gold prices moved higher despite a fall in oil prices. At the OPEC meeting, members are tussling with a decision to increase global supplies or leave quotas unchanged. Although the Oil Minister for Qatar said that all possibilities are open, he also said that he personally did not believe an increase in output was necessary. OPEC President Chakib Khelil, the Oil Minister for Algeria, said he did not see how an increase in oil supply would solve the world’s economic problems. If OPEC takes the view that it can do little to prevent a downturn led by the US housing market crisis and the resulting credit crunch, the cartel may choose not to supply the market with additional oil. In the short term, a decision to leave supply unchanged, if it boosts the oil market, might also boost gold. The gold market has focused on the Fed and interest rates recently. With the Fed meeting now out of the way, it is possible that the OPEC meeting will draw the bullion market’s attention towards commodities. If so, the price path for oil and the decisions made at the OPEC meeting may be significant for gold.

 

GOLD

China’s gold output had risen 12.67% last year to 270.491 tons, but the gain was not quite enough to overtake top producer South Africa, according to the vice-secretary-general of the China Gold Association. South Africa’s production was 272 tons. The two countries were neck and neck in gold output in the second half of the year, leading London-based GFMS to estimate that China had already become the world’s largest producer in 2007.

The CGA’s Hou Huimin said, “The real output may be a little higher and we may have to adjust final figures a little, because of the special characteristics of Chinese statistics, but for now we are going with 270.5 tons.”

While Chinese gold production increased by an estimated 12% year –on-year, South African mines produced 8% less gold than in 2006. South Africa has held the accolade of the biggest gold producer since 1905, but its output has been in steady decline since the peak of 1000 tons in 1970. GFMS partly attributed the sharper-than-expected decline in South African output to safety-related mine closures, and the one-day industry-wide strike, held by the country’s biggest mining union in December which had knocked almost a ton of output off the country’s total yearly production.

Philip Klapwijk, GFMS chairperson said that shortages of skilled personnel and supply bottlenecks were a factor in the decline in world gold production. New projects, mine expansions and even operating mines were being affected by these constraints. Costs were also pushed upwards by the growing levels of development being undertaken by producers as they sought to capitalize on the price rally, Klapwijk said. South African output was constrained by dwindling ore grades, accidents and rising labor costs on the back of a strong rand, and exacerbated this month by massive power outages.

Power cuts also forced closure of gold mines in Guizhou (China) this month, after unusual snowfalls.

Peru recorded the biggest decline, with gold production falling an estimated 17%; while Indonesia and Brazil were the top gainers, with output rising by an estimated 18% and 16% respectively.

Chile could become one of the world’s ten largest gold-producing countries thanks to the development of the Pascua-Lama and Cerro Casale projects. The Chilean Copper Commission which monitors the country’s mining industry, said the country produced 40,800 kg of gold last year and is to produce a similar amount this year, placing it in fifteenth position, but the new mega-projects, both controlled by Barrick Gold, the world’s largest gold producers, could lift national output to almost 100 metric tons.

Gold supply saw increased tightness in the year ending 31 September 2007 as mine production remained flat, but producer de-hedging continued and official sales and recycling dropped. The World Gold Council’s Gold Investment Digest said total mine supply dropped 2% to 2145 tons over the year from fourth quarter 2006 to end of third quarter 2007. This came as mining production remained about flat at 2504 tons but net producer hedging reached 359 tons over the year.

Official gold sales under the second Central Bank Gold Agreement dropped 6% to 446 tons and recycled gold dropped 15% to 966 tons.

The Digest said one of the biggest contributors to tightness in supply in recent years was the rise in producer dehedging. “According to Virtual Metals, the global hedge book was reduced by a further 2.1 million ounces (65 tons) in third quarter 2007, reducing the hedge book to 29.1 million ounces (905 tons) from 101.4 million ounces (3,153 tons) in mid-2001.

“De-hedging looks set to remain an important theme in 2008, following AngloGold Ashanti’s announcement in late December that it will close out its 10.6 million ounce (330 tons) hedge book” said the Digest.

Mine production for the first three quarters of 2007 was also “more or less flat” as industry extracted 646 tons in the third quarter—bringing production to 1842 tons, only 2% higher compared to the same period in 2006. Available information suggested that central bank gold sales under the fourth year of the second central bank gold agreement--running from 27 September 2007 to 26 September 2008—was approaching 140 tons according to the Digest. The main sellers have been the European Central Bank (42 tons), France, the Netherlands and Switzerland, which have sold around 30 tons from October to December.