Rust Rare Coin, Inc. April, 2008

PRICE TRENDS

IN OUR OPINION. . . .

With the Fed jumping in this month and attempting to slow the fall of the dollar, we finally saw the correction we have been waiting for for the last few months. Unlike most corrections where there is a steady downward trend which settles, this market will probably be continue to be volatile over the next few weeks.

The reasons for volatility are many. Funds which have had problems during the first quarter of this year are seeking to balance their portfolios. Talk of recession seems to now be founded. Economic indicators are negative. There are huge concerns with oil prices and energy costs. It is difficult to understand how the Fed believes inflation concerns will not be as prevalent as they have been over the last few months.

However, we are not seeing any change in the fundamentals of the precious metals market. Our markets continue to expand even with higher prices as more and more investors, many of them new to the precious metals sector, look for diversity and balance within their own portfolios. We feel that that the metals market should see continued growth and strength for the next year to 18 months.

Spring is a time for reassessment. We encourage you to keep your eye on the market. As we have stated many times, watch for the dips and take advantage of them. We look forward to working with you in developing the type of balance you feel you need so that you can take advantage of this bullish trend that we are enjoying in the precious metals market and strengthen your portfolio.

MARKET FOCUS, EMERGING TRENDS

James Steel, Analyst, HSBC Global Research

The combination of slowing economic growth and likely lower interest rates, coupled with rising inflation, are conducive to higher gold prices.

The broader commodities rally particularly that of oil, is in our view, a cornerstone of the ongoing gold rally. The oil cartel, OPEC, released a communiqué after its meeting stating output would be left unchanged. In doing so, the cartel rejected a call by the Bush Administration to increase supplies, maintaining instead that the market is well-supplied, pointing out that current commercial oil stocks are above their five-year average. Rather than blame OPEC policies, OPEC President Chakib Khelil said mismanagement of the US economy had caused the US dollar to weaken, which in turn contributed to higher oil prices.

Saudi Arabia and other moderate members refused proposals from price “hawks,” Algeria and Venezuela, to cut production or hold an emergency meeting ahead of the next scheduled gathering on September 9. According to the International Energy Agency, this may not be enough to stop prices from rallying even further. The IEA warned that the world economy may need more oil before the summer and therefore urged OPEC countries to listen to market signals and raise output. The drop in weekly US oil inventories also helped support oil prices and therefore, gold.

The refusal of OPEC to supply more oil after clear requests by the Bush administration to do so, is interesting and supportive of gold prices. President Bush attacked OPEC for its lack of action and said its policies were harming American families. The resulting increase in tensions between the US and OPEC and the apparent reluctance by OPEC to curb oil prices is also supportive of gold prices. Non-oil commodities however, are also rallying, including base metals and grains. The fact that a range of unrelated commodities are rallying, broadly in sync, supports OPEC’s contention that US dollar weakness is at the root of the commodities rally, not producer policies. Whether the climb in oil and commodity prices is due to OPEC policies or the sliding US dollar, the end result is still bullish for gold.

Sustained investor liquidation pushed precious metals prices substantially lower in active trading. The liquidation of long precious metals positions was largely due to hedge funds’ selling. The change in fortunes of many funds, following a profitable 2007, may play a role in influencing bullion prices going forward. Hedge funds have had the worst start of any year so far on record, with several funds folding. HFRX index data from Chicago-based Hedge Fund Research, a consultancy that monitors and tracks hedge funds, showed average losses of 2.4% for the industry in March. This would make March the worst single month for hedge funds since the collapse of Long-Term Capital Management in 1998. Although most losses were reported mostly in relative value funds, which do not hold commodities, some macro funds that are known to be heavily long commodities, according to the Commodity Futures Trading Commission, also incurred losses. It appears likely that losses in other financial markets, in combination with the US dollar rally, have compelled many hedge funds to lighten their commodity exposure. Tighter credit conditions also make it more difficult for funds to avoid liquidating long commodity positions. Should this continue, gold is likely to remain on the defensive.

If investor risk appetite is swinging from risk-averse behavior back toward greater risk-taking, further liquidation may be in store for the precious metals.

Going forward, a key factor likely to influence investor risk tolerance, and hence gold prices, will be investors’ confidence in the financial markets and their assessment of authorities’ success in addressing the credit crisis. Comments by British Prime Minister, Gordon Brown, may hold ramifications for gold in this regard. Mr. Brown urged leading world economies and international institutions to act on the financial turbulence afflicting the world economy. An opportunity to do so may arise at the Group of 7 meeting in Washington, tentatively scheduled for April 11. Furthermore, the prime minister went so far as to suggest that the possibility of using government funds to bail out banks caught in the credit crisis should be discussed when the IMF’s Global Stability Forum presents a report to the G-7 on strategies to combat the financial crisis.

The British prime minister’s suggestions, in combination with US Treasury Secretary Paulson’s proposals for regulatory reform, show that the credit crisis is receiving the highest governmental and central bank attention. For the moment the financial markets appear at least partially assured that a solution to the crisis is being sought. Consequently, the equity markets and US dollar have strengthened, and hard assets, including gold, have sold off. Perhaps in the run-up to the next G-7 meeting, investor risk-aversion will continue to recover in expectations of a global initiative, such as that suggested by Mr. Brown, to combat the crisis. If so, the precious metals markets may remain under pressure in the short term.

Though gold prices may be depressed in the short term as risk sentiment returns, any resurgence in investor risk aversion could easily cause bullion to rally. We find it interesting that recent proposals, and discussions of them, to solve the credit crisis by the US Treasury secretary, the British prime minister, and EU Commissioner Charles McCreevy have a common theme, namely, that there is no simple or quick solution to the financial crisis and that any meaningful remedy may take many months, if not years, to implement. Should the crisis drag on and investors become disillusioned, the precious metals could easily recapture recently lost ground. We suspect, however, that in the next several days, the price path for gold is lower. That said, the bullion market may recover quickly should the next G-7 meeting fail to produce a concrete plan to combat the crisis.

We find it interesting that gold failed to rally on news of write-downs at European banks. Rather, gold sold off as the US dollar appeared to benefit from evidence the credit crisis was hitting foreign financial institutions. As pointed out by currency analysts, it appears that the USD/EUR is becoming more sensitive to economic data from the euro zone than from the US. Should this continue, the US dollar may rally by a greater-than-usual margin on disappointing euro-zone data. This would likely also weigh on gold.

 

SILVER

Revolutionary uses for silver are being engineered all over the planet. Check out some of these ideas.

The US Food and Drug Administration has cleared for marketing a breathing tube coated with a thin layer of silver designed to reduce the risk that patients on ventilators will acquire pneumonia while in the hospital. The endotracheal tube is intended for patients who must rely on a ventilator to breathe for 24 hours or more. Currently 15% of patients on ventilators develop ventilator-associated pneumonia every year and 26,000 die from the infection. In a clinical trial of the silver-coated tube, the percentage of patients who developed pneumonia was reduced from 7.5% to 4.8 %.

If any place needs germ protection, it’s locker rooms. To help inhibit bacterial, mold, and odor build-up on locker surfaces, as well as stop the touch transfer of microbes on locker handles and doors, Lyon Workspace Products of Montgomery, Illinois, has introduced silver-based antimicrobial lockers.

Fabrics that generate warmth, control bacteria, reduce odor, and stimulate muscle tone may seem a bit futuristic, but clothing made of silver-coated textiles has created a new class of consumer wear with more applications ahead.

Silverlon fabrics have revolutionized the clinical dressing market. They provide effective antibacterial control for wounded soldiers in the Iraq and Afghanistan wars. The fabrics also are made into antibacterial blankets for the wounded as they are transported in military aircraft on long flights to veteran’s hospitals in the US.

The electrical conductivity of silver-coated ProtexAg textiles provides the clothing with a further advantage, electrically heated outerwear. Hunters motorcyclists, scuba divers, and spelunkers are recognizing the merits of battery-heated clothing to extend their time in cold environments. Military pilots flying at high altitude during long missions can fly in warm comfort and at the same time reduce muscle fatigue using these heated clothes.

Silver fabrics may also prove useful for those with carpal tunnel syndrome. Patients report a 70% pain reduction within 96 hours and 95% pain reduction within two weeks after wearing a special sleeve.

Starting this fall, textile and chemical manufacturer Milliken & Company and outdoor products company Browning will team up to offer a retail line of scent-control hunting apparel powered by Milliken’s Visa Endurance Shield, which uses silver ions to control odors. Scent control is vital for hunters because many animals, such as deer, can pick up human odors from far away.

 

PLATINUM/PALLADIUM

Worries about South Africa’s long-term ability to supply adequate power to meet the mining industry’s requirements helped boost platinum prices. In the precious metals complex, platinum retains the most bullish underlying fundamentals and may press higher, even if the rest of the complex turns negative. Eskom management (the state-owned power company) is cautious about the utility’s ability to increase electricity reserves quickly. They warn that South Africa’s power supply crisis may last for many years unless there is a sustained drop in electricity demand. Although Eskom is producing about 95% of normal requirements, further cuts were being planned. Management went so far as to say that the utility would welcome delays in construction of energy-intensive projects, including smelters and other mining projects.

In addition to its inadequate power-generating capacity, Eskom’s stock of coal, which provides 100% of the feedstock for power generation, remains low. Inventories have fallen to an average of 12 days of supply at its plants, well below the 20-day level Eskom targeted. Such candid comments by top Eskom officials do little to alleviate anxiety about another power supply-led disruption in mine output. Given the Eskom comments, the outlook for PGM output is highly problematic.