Rust Rare Coin, Inc. February, 2009

PRICE TRENDS (New York closes)

IN OUR OPINION. . . .

Since the inauguration of our new President market volatility and uncertainty seem to be running rampant. With the political changes most of us are hoping for at least some change in direction, but as of yet Capitol Hill seems to be offering the same old rhetoric.

Precious metals seem to be returning to a more consistent way of trading and prices should continue to move upward. Indications that gold could hit $1000 in the near term are being mentioned regularly. With the silver/gold ratio still out of balance, we believe that silver will continue to move upward to a more consistent 55/1 ratio. Demand continues to remain very strong. We are finally seeing supply being met in a more timely fashion.

We would continue to encourage a well-balanced portfolio. That includes roughly 10% of your holdings in precious metals. We hope that most of you who have been adding metals to your portfolio over the last few years have weathered this storm much more easily than those who are positioned only in paper. Some of our new clients are showing as much as 40% loss in their paper assets. Even though the paper price on precious metals was significantly lower, you who follow metals closely realize that premiums changed dramatically and holding physical positions in precious metals actually preserved your position.

We look forward to continuing to serve you.

MARKET FOCUS, EMERGING TRENDS

James Steel, Analyst, HSBC Global Research

Gold prices were pressured lower by disappointing euro-zone economic data. Eurostat reported that producer prices in December fell 1.3% from the previous month and rose only 1.8% in all of 2008. Official data also showed that Spanish unemployment rose by nearly 200,000 in January to 3.33 million, the highest rate on record. Meanwhile, German retail sales in December fell 0.2% from November, marking the third consecutive monthly decline according to Federal Statistics. The Internal Monetary Fund lowered its forecast of Asian growth for this year to 2.7% from 4.9%. Dominique Strauss-Kahn, the IMF’s managing director, warned that the continent’s economy could slow even further than the latest forecast. Against this weight of negative data, the National Association of Realtor’s report of December’s 6.3% rise in US pending home sales, compared to November, had little impact on gold. Rather, the bullion market took its cue from weak economic data and evidence of mounting disinflationary pressures worldwide.

Interestingly to us, gold ignored two ostensibly bullish developments, a surge in exchange traded funds demand, and further weakness in the USD. Off-take in the GLD, the largest of the gold ETFs, rose nearly 10t to 853.37t on February 2 from 843.59t from the previous trading day. The USD/EUR traded lower, as safe-haven demand for the dollar also eased, according to Reuters. A reduction in investor risk sentiment may provide some explanation for gold’s decline.

An increase in protectionist sentiment could be a source of support for gold. Canada and the European Union voiced official concern at what both described as protectionist US legislation, specifically the so-called “Buy American” bill now before Congress The legislation, the “American Steel First Act,” would require federally funded construction projects to use 100% US-made steel products. US trading partners assert that the legislation would violate rules of the North American Free Trade Agreement and the World Trade Organization. A rise in protectionist sentiment is traditionally supportive of gold prices, because it is usually accompanied by a rise in geopolitical tensions and economic stress.

The PGMs came under pressure following the release of more disappointing US auto sales data. Ford Motors posted a steep 40% drop in US sales in January, compared with a year earlier. Toyota Motors saw its US sales in January drop 34% from January 2008. Nissan Motors reported that its US sales were down 30% in January, compared with the same month a year ago. Sales of vehicles built by Chrysler were down 35% in the US in January, compared with the same month last year. European automakers Mercedes-Benz and Volkswagen reported that their US sales in January were down 36% and 12% respectively, from a year earlier. US auto sales are running at an annualized rate of less than 10.5m units for 2009, the lowest rate since 1982 and considerably below 2008 sales of 13.2m vehicles. Sales of more-expensive SUVs and luxury vehicles were especially hard-hit, according to the automakers. SUVs require heavier PGM loadings in their catalytic converters due to their larger engine sizes. Until auto demand stabilizes, it may be difficult for the PGMs to mount a sustained rally.

While autocatalytic demand for PGMs is clearly weak, as evidenced by the decline in US auto demand, Impala Platinum’s Zimbabwe unit, Zimplats Holdings Ltd., reported record metal sales. The company reported that PGM sales increased to 61,030 oz. in Q4 2008 from 32,879 oz. in Q3. Zimplats also said it was making progress on implementation of the Ngezi Phase 1 expansion project, but that managers still worried that a shortage of foreign currency would lead to further economic deterioration in the country and worsen business conditions.

 

 

 

SILVER

Silver/Gold Ratio Reversion

By Adam Hamiton, Kitco

While wreaking its unbelievable destruction last quarter’s financial market panic certainly showed no favoritism. Launching from ground zero in the financial stocks, shockwaves of selling blasted out through the entire market landscape. Everything speculators once loved was left in ruins, including silver.

Back in July 2008, when the financial markets remained oblivious to the tsunami of fear approaching, silver averaged $18.07 on close. But by November when popular stock market fear reached a fever pitch, silver only averaged $9.81, a 45.7% loss on the monthly averages. Since those depths silver has strengthened considerably. During the first week in February it averaged $12.46; 34.1% higher than its average $9.29 close in the week leading to its panic low.

This impressive run in silver has led some traders to wonder whether it is getting overbought and the short-term risk-reward equation is shifting out of its favor.

Despite all silver’s own fundamental merits, its primary technical driver is nearly always the price of gold. In a favorable gold-price environment, speculators’ interest in all the precious metals grows, so they deploy increasing amounts of capital in silver. In this tiny market, it doesn’t take much buying to drive big and fast price spikes. And when gold is weak, silver speculators lose interest fast.

This gold-driving-silver dynamic remains controversial among some silver investors, but it certainly shouldn’t be. Silver generally lags gold initially, but as gold gathers steam speculators flock to silver and ignite the sharp moves higher that this restless metal is so famous for. Gold leads the way.

On most days during the panic months when gold was up, silver would rise too. But usually it would just pace gold’s gains at best, and sometimes not even match them. But on days when gold was down, silver would often plunge dramatically and multiply gold’s losses. Playing out over months, this outsized downside pressure on silver whenever gold was weak led to the serious decoupling now evident.

Why was silver so much weaker than gold during the financial panic? Silver’s price is much more dependent on sentiment at any given time than gold’s. And sentiment during the panic was exceedingly rotten. Speculators sold everything universally, sparing nothing. The riskier any particular asset, the more aggressively it was liquidated to raise precious cash and to protect from the threat of further losses.

For a variety of reasons, I fully expect silver’s historic relationship with gold to normalize. It has existed for so long that a fear bubble in the stock markets lasting a few months shouldn’t be able to sever it forever. Nothing fundamentally changed on the silver or gold mining fronts during the stock panic, so the secular-bull pictures for both metals look similar today as they did back in July. Silver speculators will always be interested in the much larger gold market and watch it for clues on how to bet on silver.

At $900 gold and a normal historical 55 silver gold ratio (SGR), silver should be trading near $16.36 today. (Feb. 9) This is 30.8% higher than it was trading in the middle of this week! So even if gold does nothing, a simple mean reversion in the SGR to pre-panic levels implies a silver price much higher than today’s still-depressed levels. Until silver returns closer to its normal range relative to gold, the short-term case for this white metal remains very bullish.

GOLD

Gold prices are trending higher. There are reports of shortages of gold coins around the world. April gold futures contracts closed up $9.70 at $902.20 with ongoing support from low global interest rates and slow economic growth.

In six short years, the tables have turned dramatically for gold. In 2001, the production costs of gold were roughly $160 per ounce as prices dipped to $270. Then in early-2008, production costs rose to $400 to $500 an ounce as prices briefly hit $1000. Just as the outlook for gold was too gloomy in 2001, it probably got too rosy early in 2008. Much of the credit for gold’s rise can go to the consolidation that has taken place in the mining industry. This activity led to more disciplined production decisions while the US economy and dollar stumbled.

The heaviest burden on gold prices typically comes from central bank sales. In September of 2004, a new five-year agreement limited sales to 500 tons per year. However, bank sales did not reach their limit in 2008 and some are guessing that banks are no longer eager to sell their gold. On April 8, 2008, the International Monetary Fund let it be known that it may sell 13 million ounces of gold over several years to raise cash.

On September 17, 2008, GFMS Ltd. said that world mine production will be down 2.3% in 2008 to 2442 tons, the lowest since 1996. On November 20, 2008, the World Gold Council said that world gold demand was up 18% in the third quarter from a year ago. On November 21, 2008, an analyst was quoted by Bloomberg News as saying that world gold production will be down 3% in 2008 and down 5% in 2009. Reduced world production at a time when the US will likely be diluting its currency to pay for financial bailouts makes gold look attractive. Also late in 2008, there has been talk that the financial panic has led to a shrinking supply of gold coins available.

The US real estate market, continues to show few signs of breaking up and dissipating, as American homeowners “lost” $3.3 trillion in market value last year. A quick glance at several markets reveals that despite “adjustments” ranging from 10 to 30 percent, there is room for more declines, of at least equal magnitude. One in six Americans is living in a home that is worth less than the outstanding loan they owe on it.

Sam Olesky, a “mainstream” money manger finds that the presence of gold in a diversified portfolio adds up to “investment MSG”—that is it enhances the winning flavor without adding too much of a potential headache. Such behavior was the focus of previous WGC studies, and it merits attention, so long as you don’t overdo it.

According to Sam, “Many investors have been thinking about gold recently. Some have considered it because it has been a relatively strong performer with the iShares COMEX Gold Trust (IAU) closing up 5.4% in 2008. It’s up 2% year-to-date as of Feb 3 close. The iShares S&P 500 Index EGF (IVV) was down 36.94% in 2008 and is down 6.17% year-to-date as of Feb 3 close. Other investors or traders have bought or considered gold as a classic safe haven.”

PLATINUM

Job losses in South Africa’s mining sector in 2009 will be widespread as companies restructure their operations in view of weaker demand and lower resource prices, consultancy Frost & Sullivan said mid-January.

“Only the coal industry may be spared, as Eskom [electric company] provides a ready market for all domestic [electricity] produced and electricity generation expansion remains a top priority,” Frost & Sullivan metals and mining analyst, Wonder Nyanjowa said. South African mining companies would have to place greater emphasis on efficiencies and cost containment this year as the effects of the economic downturn continued to be felt on the commodities market, he added.

High cost marginal operations would be dropped as mines looked to preserve cash and ensure profitability. “Resource prices are likely to pick up at the tail end of second quarter once the global economic slow down starts lifting but not by the substantial margins that will spur increased production,” said Nyanjowa. “Production output, particularly for gold and platinum, will continue declining.”

He expected gold production to fall from the 240 tonnes produced in 2008 to around 229 tonnes in 2009. Nyanjowa said the gold price, which ended 2008 at $865 per ounce, was expected to continue rising slowly and might again break the $1000 an ounce level in the course of this year. He said that gold’s status as a safe-haven had protected it from the significant falls in prices seen in some other resources.

Platinum’s price was, however, closely tied to developments in the global automotive industry, which was the single largest source of demand for the precious metal. “The prolonged delay by the leading three US automakers in accessing bailout funds, the one month long closure of Chrysler, and declining new vehicle sales across Europe and America will continue to depress sentiment in the platinum industry,” Nyanjowa said.

Some industry players expect an about-turn in demand fundamentals in 18 months time and different mines are taking different approaches to manage the situation in the interim. “Lonmin has laid off 5500 employees to trim its cost structures, while Anglo Platinum has halved its capital expenditure and monitoring production levels in view of the demand for platinum,” Nyanjowa said. “This is even though more than 60% of Anglo Platinum production could be unprofitable at current levels.”

A study released in August 2008 suggested that it was costing the company $1200 to produce an ounce of platinum. The collapse of Impala Platinum’s bid for Mvelaphanda and Northam, coupled with the rejection of Xstrata’s $10bn bid for Lonmin, indicated a temporary end to mergers in the mining sector. “The appetite may however return once commodity prices and demand for metals start climbing again, as company valuations will be at attractive levels,” Nyanjowa added. “Issues around electricity, safety, skills and labor activism will deliver further production cuts in the platinum sector this year,” he added. “Production dropped from 5.2 million ounces in 2007 to 5.1 million ounces in 2008, and we expect it to decline further to about 4.9 million ounces in 2009.”