Newsletter

Rust Rare Coin, Inc. Summer, 2009

PRICE TRENDS (New York closes)

	12-31-07	3-31-08	6-30-08	9-30-08	12-31-08	3-31-09	6-30-09
Gold	$ 839.60	$ 916.20	$ 924.90	$ 870.00	$ 888.10	$ 915.80	$ 928.50
Silver	$ 14.77	$ 17.27	$ 17.40	$ 12.06	$ 11.33	$ 13.06	$ 13.62
Platinum	$1539.50	$2043.40	$2051.00	$ 998.00	$ 928.00	$1113.00	$1171.00
Palladium	$ 370.05	$ 450.20	$ 460.00	$ 195.00	$ 185.00	$ 214.00	$ 249.00
Dow	13, 265	12,262	11,350	10,851	8,776	7,609	8,447

IN OUR OPINION. . . .

Unlike many years when the focus during the summer has been away from the markets, this summer, the economy continues to be on everyone’s mind. Everyone seems to be looking for answers, but very few answers are readily available.

The trillions of dollars being put into the stimulus packages both here and abroad are now starting show some results. Many states are reporting job growth in the road construction area, as that is where many states are concentrating their “stimulus” dollars. While this is a good short-term solution, it seems to be a very expensive way to employ people for a short time. We are watching the effects of government programs in other countries to see if their economies are lifted any quicker than that of the US.

The whole stimulus program is extremely inflationary, but people aren’t focusing on that because of the fact that they are losing value in their homes, etc. There will come a point when those stimulus dollars have to be paid back. It certainly seems that the payback structure has been put on the back burner in hopes that the initial infusion creates hope in the market place. Having precious metals will protect against inflation and will give stability as the value of the dollar changes over the next few years and as the recession hopefully comes to an end.

Precious metals will continue to be very volatile over the next few months as most economists are watching the dollar for direction. With each economic report we seem to get a little different view of what the dollar is actually doing. We believe this will continue until there is some actual stability in not only the housing market, but also the manufacturing and automotive sector as well.

SILVER REACHES SECOND HIGHEST

HISTORICAL PRICE IN 2008

Investor and Industrial Demand Push Prices Upward: World Silver Survey

Strong investor interest and solid industrial demand last year drove silver’s annual average price to its second highest level in the metal’s history, according to World Silver Survey 2009. Last year represented a 12% increase in the average price, US$14.99 per ounce over 2007, and was the seventh consecutive annual rise for the metal, highlighting silver’s dual role as both an investment vehicle and an industrial metal.

The Survey stated: “During the first half of 2008, investors drove prices up to well above the $20/oz mark (a high of $20.92 was recorded in March) against a backdrop of still generally firm fabrication demand.” It was a different story in the second half, though, as the economic outlook deteriorated; but the first four months of this year saw the price recover a good part of lost ground, the Survey noted.

Demand

Coin and medals fabrication in 2008 jumped 63% to a record 64.9 million ounces mainly due to a surge in investment-related purchases of bullion coins, both in the United States and Europe. U.S. Silver Eagle bullion coin sales reached a record 19.6 million ounces last year, almost twice the 2007 figure. Sales would have been higher if the U.S. Mint had sufficient blanks to produce coins to meet demand. In 2009, the U.S. Mint has achieved a nearly 70% year-on-year rise in the first quarter.

Total global fabrication demand slipped a modest .09% in 2008 to 832.6 million ounces, mainly due to poor economic conditions. Jewelry fabrication dropped by 3.2% to 158.3 million ounces in 2008 because of weaker offtake in Italy and Thailand, although growth was stronger in India, China and Russia. Silverware demand fell 2% in 2008 to 57.3 million ounces as losses in western markets were partially offset by gains in India, which saw a 7 % rise, as well as Russia, which also enjoyed growth in consumption last year.

Supply

Driven by gains in Latin America, Asia and the CIS, global silver mine supply recorded its sixth year of consecutive growth, totaling 680.9 million ounces, representing a record high. “Looking at the individual countries, the strongest gain was seen in Bolivia, where output more than doubled owing to a full year of production from the San Cristobal property,” the Survey noted. Russia experienced a 24% gain.

On the government side, net sales in 2008 fell by 27% to 30.9 million ounces, their lowest annual level for over a decade. Last year’s decline was primarily due to a reduction in Russian official bullion sales in conjunction with the absence of sales by both India and China.

The World Silver Survey was independently researched and compiled by London-based GFMS Limited and has been published by The Silver Institute since 1990. Eighteen companies and organizations from North and South America, Europe, Australia and Asia sponsored the report.

SILVER

Investment demand for silver, mainly from Exchange Traded Funds (ETFs) and in the form of direct purchases of bars and coins, will increase sufficiently to offset a projected fall in industrial demand, according to The Silver Investment Market, an independently prepared report by precious metals consultancy GFMS Ltd., commissioned by the Silver Institute, and released in April 2009.

“The growth in investment over recent years can be linked to a number of important developments” the report noted. “First, improving supply/demand fundamentals, in particular the erosion of near market stocks due to the heavy supply deficits in the 1990s, set the scene for investors to return to the buy side in the early part of this decade.”

The growth in silver investment has been helped by a general flow of funds into commodities. “Not only has this helped to reaffirm silver as an asset but also investment in the white metal has taken place ‘indirectly’ through investors purchasing index and basket products that contain some weighting in silver,” the report noted. This increase in silver demand has taken place in an environment of firm silver prices. During the first quarter 2009, the silver price averaged $12.60 an ounce, up 23% compared to the fourth quarter of 2008.

GOLD

“Gold in India” from The Hindu

India’s gold imports may fall by about 44% to 10 tonnes in June over the previous month due to high prices and low demand for the precious metal in the domestic markets, experts have said. Gold imports stood at 18 tonnes in May, according to the data provided by the Bombay Bullion Association.

“Gold imports in June will be about 10 tonnes as the demand has slowed down following high prices. Unless the prices come down, there will be no improvement in imports,” Bombay Bullion Association Director Suresh Hundia told PTI. In the international markets gold prices were at $938.55 an ounce.

The import of gold has been sluggish so far this year and is estimated at around 50 tonnes during the January-June period compared to 139 tonnes of gold shipments into the country during the corresponding period of 2008. There were no imports in February and March owing to absence of demand in the domestic market following high gold prices. In April, India imported 20 tonnes of gold due to the rise in demand for “Akshaya Tritiya”—a festival which is considered auspicious to buy the precious metal.

Millions of owners of mobile phones, iPhones, picture-phones, and a host of other hand-held electronics have silver to thank for the high performance of their devices. An innovative and economical mass production technology for building these devices relies on a production method known as ‘surface mounting,’ which allows components to be fastened both mechanically and electronically to printed circuit boards. Components such as condensers, resistors, and diodes are placed in indentations on circuit boards and a wave of molten silver alloy solder flows across its surface to create an instantaneous permanent bond between the two. The technology permits upwards of 200 contacts for components and connections on a small board, increasing the range of features possible in the device while keeping it extremely small.

Surface mounting technology replaces the old-style use of holes into which component wire leads were dropped for soldering. In today’s drop-on technology, components are now dropped close together at precise locations for soldering, greatly increasing the useable area of a board and employing both sides to double the density of components. The fluid silver-tin alloy rapidly wets the metal surfaces to provide an instantaneous, highly conductive connection between all the components and the circuits of the board to permit rapid assembly. With the circuitry complete, the only remaining connections are those to the controls and the viewing screen.

Surface mounting has been a significant labor and cost-saving technology, bringing down the price of the most advanced devices to an affordable level—along with shrinking component size—while greatly increasing the complexity and sophistication of the device.

Developed about 20 years ago, the technology had used a lead-based solder with only a small amount of silver to assure the strength and adherence of the connections. Now, however, the use of lead is forbidden by the European Market Directive on Reduction of Hazardous Substances, and several US states currently are considering similar regulations. The Directive prohibits the use of lead and cadmium from electrical and electronic equipment which has long sued these metals for soldering electronic components.

One US company meeting the lead-free solder challenge is Haraeus, Inc., of West Conshohocken, Pennsylvania. It has developed a low-temperature lead-free solder that meets all the requirements of surface mounting technology using 96.6% tin and 3.4% silver. Lead-free solder means a 30% increase in the use of silver over the former lead-containing solders for the billions of connections made daily by the electronics industry. According to The Silver Institute’s World Silver Survey, 61.4 million ounces of silver were used for electrical and electronics fabrication in the US in 2008, with world use at 201.7 million ounces. Substituting this new solder will greatly increase the proportion of silver used in the coming years.

In a statement issued on June 19, 2009, the World Gold Council (WGC) says it welcomes the news that the U.S. Congress has, in effect, finalized the process whereby the IMF can sell 403.3 tonnes of gold “in a manner that will have no impact on the smooth running of the international gold market.” The approval was tied to the Military Supplemental Bill which covered additional funding for the Iraq and Afghanistan conflicts for the U.S. forces and also approved $108.6 billion in funds to support the IMF in a role to prevent global economic meltdown and the problems which might occur as a result. The Bill was passed by the House of Representatives on Tuesday, June 16th followed by the Senate on Thursday, June 18th.

While the bill itself does not specifically tie the IMF sales to an orderly sales program, the IMF has stated publicly that any such sales should be made in co-ordination with current and future Central Bank Gold Sales Agreements whereby signatories have to agree to limit total annual sales to less than a specific volume (currently 500 tonnes). (For a review of the Central Banks which signed the existing agreement and its basic terms go to Central Bank Gold Agreements (CBGA).) However the current CBGA agreement runs out in September this year and, although it is due for review, and would, on past agreements, already have been reviewed if there is to be another such agreement, there does not yet appear to have been any such review to date.

Indeed as we pointed out in our previous article – it may even be felt that a renewal of the CBGA may not be felt to be necessary as the appetite for Central Bank gold sales appears to have diminished with gold seemingly increasingly regaining lost ground in its role as a key monetary instrument and uncertainty on the future of the US dollar. If there is no renewal then it will, presumably, be up to the IMF to release its gold in a orderly manner in any case.

In the scheme of things the sale of 403.3 tonnes of gold is not a huge amount unless it all came on the market at once, and this seems unlikely. And the market already seems to have discounted the future IMF sale, so there should not be a negative impact on the gold price. Indeed the lack of reaction to Congressional approval of the sale may well be considered positive for gold.

As Aram Shishmanian, the WGC’s chief executive pointed out in a statement: “We are pleased to see that the IMF’s plan to sell gold in a structured and non-disruptive manner has gone through due political process without problem, which is a credit to the responsible behavior of all parties involved in the process. These sales will not constitute any net addition to the amount of gold the market is already expecting from official sector sources as a whole, and therefore we anticipate zero market impact. We believe this announcement, if anything, will lead to positive sentiment among market participants as it clarifies that there will be no net addition to overall gold supply.”

He goes on to say, “In these times of financial instability, gold’s universal role as a protector of wealth has come to the fore, not least as a crucial part of reserve asset portfolios. The fact that these sales will effectively rescue the IMF from a difficult situation regarding its own finances is proof of gold’s unique investment characteristics, long-recognized by central bankers and institutional and retail investors alike.”

Given the IMF’s status as “a lender of last resort”, the WGC believes it is imperative that the organization continues to hold large gold reserves and acknowledges the IMF’s public declaration that: “The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.”

Gold prices are likely to touch fresh highs in the second half of the current year on the back of investment demand and over-the-counter markets, global metals consultant, Gold Field Mineral Services (GFMS), said in their report.

“Looking at the second half of 2009, investment demand, and especially its western elements, which includes activity in ETFs, futures and the OTC market, is expected to remain the driving force behind gold price movements,” GFMS Executive Chairman, Philip Klapwijk, said in the report. The over-the-counter (OTC) market is decentralized and not listed in any exchange. In this, a participant trades over the telephone or through middle men instead of on the physical trading floor.

GFMS predicted that global investment this year will exceed 1500 tonnes or about $47 billion, which will accelerate the price to a new peak in the second half of 2009. That said, given rising fears over the long-term inflation threat in western nations, GFMS expects the world gold investment to see a massive increase this year, particularly from its implied net investment and official coin components.

The report pointed out that growth in investment demand has been the main reason for the rally in gold that has taken the precious metal from around $250 in early 2001 to the peak $1000 level in 2008 and 2009. That investment demand has been primarily driven by rising interest in gold following weakness in the US dollar since 2002, it said. And, rising commodity prices, concerns over the security of bank deposits following the near meltdown of global financial markets, and growing concerns at the potential longer term inflationary consequences of unprecedented monetary and fiscal policy easing will also push the demand, the report added.

During the 1993-2000 period, world investment in gold averaged 383 tonnes per annum, whereas from 2001-2008, it averaged 707 tonnes each year. In value terms, this represents a steeper jump from an annual average of just 4 billion dollars to nearly 12 billion dollars per year. The report added that “western” investment tends to drive prices either higher or lower, while demand in the rest of the world generally tends to support the lower levels.

Rust Rare Coin, Inc. publishes MARKET WATCH monthly as an educational service to its clients.

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