Rust Rare Coin, Inc. January, 2008

PRICE TRENDS

IN OUR OPINION. . . .

 

Happy New Year to everyone! We hope you had a safe and enjoyable holiday.

As we start into 2008 the markets are every bit as active as they were in 2007, and we expect them to continue in the same vein. There are many geopolitical issues not only here in the US with the upcoming presidential elections, but also with continued unrest in the Middle East and now also in Africa. Precious metals will continue to be a safe haven for the investor’s dollars all around the world.

We continue to hear more and more talk that metals will begin to be traded in alternative currencies other than the dollar internationally. This is a sign that the dollar is losing its prominence as the kingpin in international trade. As the importance of the dollar wanes in world economics the importance of investment diversification seems to be more and more evident with each passing day.

This month’s articles offer a variety of opinions. Because the metals markets are moving in such drastic swings, we will see most of those opinions come about during the coming year at one time or another.

Metals have made significant changes over the past year. We realize that it will be difficult to sustain the same numbers-- gold has gone up 36% since the end of last year and silver went up 20% in the same time period. However, we truly believe that the fundamentals continue to indicate that precious metals will be active and strong during 2008.

Watch for the dips as they could be significant over the course of the year. Don’t be overly concerned when the media talks about all-time highs. One needs to keep perspective as to where the dollar was in 1980 when the previous highs took place. In 1980 the dollar had significantly more buying power than it has now. Because of that fact many economists are saying that there is room for continued growth in our current bull market trend.

We look forward to serving you with your individual portfolio investment needs through 2008.

MARKET FOCUS, EMERGING TRENDS

James Steel, Analyst, HSBC Global Research

Gold and the PGMs weakened on profit taking in light pre-holiday trading. Although the Commerce department confirmed strong growth in Q3 GDP, leading economic indicators and the Philadelphia Fed index both fell significantly. Weakness in those areas usually raises expectations for interest rate cuts, which is generally positive for gold prices. The bullion market, with the exception of silver, traded weakly, however, largely ignoring the drop in US Treasury yields, which are also generally viewed as supportive of gold prices.

Economist Larry Summers, a former Clinton White House Treasury Secretary advised the Bush Administration to provide a fiscal stimulus of up to $75 billion in order to stave off the risk of a recession. Speculating that the average US family could lose up to $5,000 in income if action is not taken, Summers said that a temporary increase in public spending could head off a much wider budget deficit that would result from even a mild recession. Playing down the risk to inflation of fiscal stimulus, which Summers believes is persistently overstated by the Fed, he said the US central bank must act more aggressively to combat the credit squeeze. Taken at face value, Summers’ comments are outright bullish for gold prices, we believe. Any significant fiscal spending would at least prompt inflationary concerns, even if as Summer’s opines, inflationary pressures are less pronounced than the Fed believes, furthermore, the stark warning issued by Summers indicates that at least in his view, the credit crisis could worsen. The warning alone may reignite safe haven buying in gold.

A contributing factor to the long run rally in gold prices is the lack of growth in new mine supply. Gold Fields, the fourth-largest gold producer in the world, said mid-December that it expected overall attributable production for the quarter ending on 31 December to fall about 3.5% and cash costs to rise. Group total cash costs would rise by 8% in USD terms and 3% ZAR terms. Output at its South African mines would be lower due to accident-related stoppages, according to the company. The problems faced by Gold Fields are widely shared by other producers across the industry. Rising costs, various production problems, and lower ore grades are inhibiting gold production despite high prices. The paucity of new mine output will remain a supportive factor in the bullion market, we believe.

China increased interest rates on Dec. 20^th, while the Bank of Japan left rates unchanged. The announcement of the rate rise came shortly after the People’s Bank of China released a survey of depositors’ views, showing their unease with high prices and their expectations that prices would continue to increase. Increases in meat prices have helped push Chinese consumer inflation to 6.9% in November, according to the bank. Real interest rates are still negative in China, as state managed interest rates are below the inflation rate. Negative real rates are traditionally supportive of gold demand. However, the People’s Bank of China stated repeated interest rate rises may be increasing savers’ confidence. The bank said the survey also found an increase in the number of depositors who felt that the increase in interest rates was appropriate. Recent stock market declines in China may also have funneled money back into savings accounts according to the central bank. Should depositors’ confidence rise further, investment demand for gold is likely to decline, we believe.

We do not believe silver’s out performance of gold is evidence of more compelling fundamentals. Rather we believe the recent trading was tactically-based and may revolve around the gold-silver ratio, which now stands at 56:1 (Dec. 20, 2007). This notwithstanding, the largest silver ETF, rose by 2 million ounces in one day according to the last reported data, indicating strong investor interest. Silver production is rising rapidly, however, and demand for jewelry is inhibited by high prices. It may be difficult, therefore, for silver to sustain its gains, in our view.

In the new year gold and silver pushed higher as concerns revolving around the financial sector and the continuing credit situation increased demand for safe-haven investments, including gold and US Treasuries. Platinum weakened on profit-taking until late buying was triggered by a generally optimistic outlook on auto sales from General Motors’ CEO, despite poor US sales data.

Investor risk aversion remains high, much to the benefit of gold and US Treasuries. The flight to quality in recent days to US government securities has been mirrored by increased investor appetite for gold. The gold rally has coincided largely with a contraction in the commercial paper market, another indicator of investor risk sentiment. The US Federal Reserve reported some recent improvement on this front, which may hold ramifications for gold. Further recovery in demand for this type of US asset-backed commercial paper might indicate an increase in risk sentiment. This in turn could have negative implications for gold.

Other factors remain firmly gold-friendly, however; in particular commodity prices. Oil prices touched $100 per barrel for West Texas Intermediate, amid another decline in US inventories, before settling lower.

A recent article in the Economist discusses the possibility that if financial institutions face further difficulties this year, and the economy weakens as a result of banks’ unwillingness to lend, then monetary authorities may face renewed calls for rate cuts. Further cuts could trigger renewed strength in asset markets. A similar monetary easing in 1998 helped create the dot-com boom and in 2002 boosted the housing markets. The article speculates that rate cuts in 2008 could benefit emerging markets or alternative-energy companies. We believe that commodities and, in particular, gold could be added to the list of items that are likely to benefit from further central bank rate cuts. Our reasoning is based in part on the strong positive price relationship that has developed between gold and emerging markets and energy in the last several years.

The article also suggested that rate cuts globally could generate higher inflation, noting that outside the US, capacity utilization rates are high and inflationary pressures are more pronounced than in the US. The threat of higher inflation is traditionally supportive of gold.

Ranked against these arguably bullish factors is mounting evidence that physical demand for gold is contracting in reaction to high prices. Several jewelry store chains in India and the Middle East—regions that together account for nearly half of global physical gold consumption—have publicly stated that demand is down sharply as a result of high prices. The lag time between a contraction in demand and a decline in price can vary. In 2006, gold peaked at $730/oz in May before correcting sharply, but physical demand had already shown signs of tiring by Q4 2005. We believe that consumption is likely to stay weak in Q1 2008.

 

GOLD

The Shanghai Futures Exchange (SFE), one of China’s major futures trading agencies, is expected to launch gold futures trading soon following regulatory approval. The China Securities Regulatory Commission approved the gold futures trading on the SFE, a statement posted on its website said on December 27th. However, it did not say when the trading would be started. The launch of gold futures on the SFE would add to the hedging options for gold producers against the fluctuating global market. Gold prices have fluctuated strongly, prompting gold producers, financial institutions and investors to avert risks through futures trading. The SFE said earlier it would adopt strict regulations on the risk control of gold futures after it initiated preparation work in September with commission approval. It would ask for a minimum margin requirement of 7 % of the contract value, and clamp firmly on the daily price fluctuations, probably within the range of plus or minus five percent of the previous settlement prices.

Gold was the second new futures product to be introduced to the country’s futures market this year. The first was zinc that launched trading in March.

Last year, China produced a record 240 tons of gold, a growth of 7.15% year –on-year. In the first nine months of this year, it produced 191,456 tons of gold, an increase of 22.175 tons, or 13.1% from the same period last year.

 

PLATINUM

Honda could be ready to begin mass-producing fuel cell vehicles within a decade, the firms' President has said. Speaking in an interview with Jiji Press, Mr. Takeo Fukui said that the chief obstacle to fuel cell vehicles achieving a mass market breakthrough remains the lack of hydrogen supply facilities. However, he said that this problem could be surmounted by the home-use fuel storage system that the firm is developing. Mr. Fukui also confirmed to delegates that Honda will focus on fuel-cell powered vehicles, rather than electric cars as it seeks to comply with government environmental targets and meet the anticipated growth in demand for more environmentally-friendly transport.

News of Mr. Fukui’s comments on Honda’s strategy comes as the company is planning to release the FCX Clarity fuel cell car on a lease basis in both the US and Japan this year. The FCX Clarity is the company’s second fuel cell car after 2002’s FCX.

Fuel cell powered forklift trucks can deliver a performance comparable to battery-powered trucks but take significantly less time to refuel, a US lift truck manufacturer has said. Raymond Corporation’s research into fuel cell powered forklifts found that their braking distance, maximum travel and lift speeds are equivalent to battery-powered counterparts. Meanwhile, refueling the fuel cell trucks at indoor hydrogen refueling stations takes just a couple of minutes compared with the 20 minutes plus it takes to remove and replace a battery, Jim Malvaso, Raymond resident and CFO announced.

The research program also discovered a solution to the fact that fuel cell components are not as heavy as those of a battery and therefore do not act as a counterweight in the trucks. This problem could be overcome by adding additional weight to the fuel cell unit, which must be evenly distributed so as to make the center of gravity the same as the battery it is replacing, Mr. Malvaso said. In future truck models, the issue of weight distribution could be addressed by wholly incorporating the fuel cell into their design, he added.

Raymond has been carrying out the two-year research program under an agreement with the New York Energy Research and Development Authority and the New York State Power Authority.

SILVER

hindubusinessline.com ran the following article:

Silver may outperform gold this year in line with the long-term declining trend of gold-silver ratio. This could mean that gold may witness a 17% rise this year, whereas silver could increase by 27% according to Kotak Commodity Services Ltd. (KCSL).

“We forecast an average gold price of $814 an ounce in 2008; while silver is more likely to average $17 an ounce,” said KCSL in a report.

On Wednesday, Jan. 2nd, gold was up in Asian trade by $5 at $838.70 an ounce, while silver was up six cents at $14.85 an ounce. Last year, gold averaged $695.39, while silver was at $13.38.

Stating that gold and silver were asset classes, it said these two metals had generated a compounded annual growth rate of 14.41% and 17.34% respectively in the last seven years. “This again highlights silver’s out-performance, which we believe would continue in the years to come, given the size and depth of the market, while investors should accumulate these metals on any dips and correction,” it said.

Though gold may be in the midst of a “mega bull run,” KCSL said it believed it was time to take a cautious view on the metal. “The market sentiment is truly mixed and we believe 2008 would be a tug of war between gold bulls and bears, making forecast much more difficult,” it said.

Going by the pace of rise in gold, it reflects the growing apprehension of a much deeper financial crisis on paper. “The yellow metal is like a medicine. The more people are worried about the global financial system, the more money is flowing into it, potentially opening new upsides in the months ahead,” KCSL said.

“We now see a potential upside in gold up to $900 by next year, preferably in the first half of 2008,” it said.

The gold market has three stages spanning over 12 years, with price largely determined by currency devaluation in the first four years. The next four years are dominated by global investment demand and the final stage is the speculative “mania”. We believe, we are currently in stage two and gold has a long way to go from the current levels,” KCSL said. Fundamentals were stronger than ever with the fall in mine production and hedging activities were scheduled only in 2011. “Thus de-hedging should take prices upwards,” it said.