Rust Rare Coin, Inc. September, 2009

PRICE TRENDS (New York closes)

MOTION AND EMOTION

By Jon Nadler of Kitco

This commentary by Jon Nadler says everything that I would say for our regular

“In My Opinion” article, but Jon communicates much more eloquently.

September 8, 2009 9:05 a.m.

We will likely come to define today as “emotional.” As has been typical with each previous approach of the $1000 level, emotions are running as high as they can, in various gold-related camps. Wild declarations shall be made during the course of the day - once gain - and the media will likely not need to call various pundits for a smart quote; they will offer them up, pre-emptively.

For the fifth time ever, gold managed to etch the $1000 level into the record books as speculators pushed it aggressively higher in their search for signs of overhead resistance. A net long position nearing 600 tonnes has plenty of market watchers nervous; especially those who have seen such a tilt develop in the market without a corresponding rise in open interest. Nerves are beginning to show a bit more each day, following the recent price action.

The millennium mark in gold prices was achieved without much drama in overnight metals trading. The one percent drop in US currency gave rise to an equal-sized percentage climb in gold ahead of the NY open. A larger than $1.70 gain in crude oil, supported by the same weakness in the US currency bolstered the fund-driven advance in gold and other precious metals as well.

New York spot bullion dealings started the post-Labor Day session off with further gain. Gold opened at $1003.80 per ounce, up by $9.30 against a fast-shrinking US dollar that was quoted at 77.24 on the index, and at $1.446 against the euro. Silver rose 44 cents to start at $16.66 this morning, while platinum and palladium were shining as well on the coattail effect precipitated by the gains in gold.

Platinum was ahead by $2 at $1280 and palladium gained $2 to open at $293 an ounce. Labor action at Impala Platinum came to an end after having cost the world’s number two producer anywhere from 20,000 to 50,000 ounces in lost production since August 24.

The obvious questions arising this morning are related to what might come next, and most importantly, the crowd wants to know, when. None of the key market players we have consulted appear to have a clear-cut answer to either query. There are just as many thumbs-up on the continuation of the rally to the 2008 peak of $1033.90 as there are thumbs-down, whose owners see an overbought, and then some, market skating on very thin structural ice. Like the ice that’s forming in India as regards 2009 gold imports, or the one that could re-ignite scrap flows back to the flood levels experienced in Q1 on the back of such gold values.

For the moment, India is on a gold-buying hiatus anyway, until the 19^th of the month, due to what the local calendar defines as an undesirable time to purchase. Should pre-festival buyers return to current values later this month, they might just continue to avoid the local bazaar, as they have for most of the year.

To all of that, you can add an equal number of thumbs - sideways - belonging to those who see a new range possibly in the making: one that extends from $880 to $1080 per ounce. The reading of the chart tea leaves offers no further clarity either; some see the emergence of a triple-top in the metal, whilst others draw lines that extend to $1300 from here on out.

The “guns-and-gold” crowd is urging fellow unprepared militants to buy the metal even at this price, while others see nothing but the set-up for a huge disappointment in this spike due to what they allege is a vast conspiracy to sucker in the little people with empty vessels such as the Gold ETF which is, in their minds, bereft of any real gold. Like we said, emotions flare up at such moments in time.

Clearly, the central item of focus shaping the drama in the gold market remains the US dollar and how it is being perceived by various bettors. A raging battle is unfolding between those who see and/or demand a de-throning of the hitherto global reserve currency versus those who see a new paradigm emerging for the US economy and US consumer and thus a new dawn for the American currency as well.

The greenback bears continue to point to recent noises made by China, Russia, and now the UN about the desirability of replacing the greenback with something else more “adequate” for the global economic system. The bears also fret about the US current-account deficit and are putting the onus on President Obama to address the issue aggressively. Dollar collapse? Any day now.

Dollar bulls on the other hand, correctly question what that “something else” might be and/or what country it originates in. They also add that the dollar will benefit from the inevitable (and already underway) rise in the US savings rate and the shift in the American economy to more of an export-based model. US savings rates had collapsed to zero in April of last year but have now risen to 6% and they still might have some way to go. The yield on US 10-year bonds is running nearly 4% higher than overnight inter-bank lending rates – a differential that some analysts say makes US debt higher desirable. Dollar collapse? Nah. Dollar resurrection.

And that, folks, is what we mean by emotions.

For me, back to the price screens and the phones. As for the market, well, it ought to be in full-swing shortly. That’s what a pendulum does.

PRECIOUS METALS OUTLOOK

JAMES STEEL, ANALYST from HSBC Securities

Inflation fears have supported gold prices to date but inflation-hedge buying may ease if higher consumer prices fail to materialize. Possible US dollar weakness remains a potential source of support. Stagnant mine output and reduced official sector sales are curtailing supply, but a surge in recycled scrap and weak jewelry demand is freeing up gold for the investment markets, notably the ETFs.

Investors have also targeted silver as an inflation hedge. As with gold, poor industrial and jewelry off-take is making bullion available for the ETF, coin, and small bar markets. Mine supply is expected to grow moderately.

Although still weak, global auto and industrial demand appear to be stabilizing. This, plus production cutbacks, should help tighten PGM balances. Palladium could be supported by eroding Russian stockpile sales.

Silver - Silver prices remain well below their multi-year high of $20.82/oz reached in March of 2008, but above the recent low of $8.42 reached on 28 October 2008. Like gold, silver prices have been the beneficiary of robust inflation-hedge buying. After surging in the first quarter of 2009, however, silver ETF demand has moderated.

The decline in fabrication demand has effectively released bullion for the investment sector, including the ETFs, as well as small bar and coin demand. The pronounced decline in non-investment demand is largely a reflection of the slide in global industrial production and the decline in demand for luxury goods, including jewelry. Photographic demand for silver continues to decline as traditional cameras lose market share to digital cameras.

Meanwhile, silver mine supply is set to increase about 16 million ounces this year based on producer statements. Most of the increase is likely to come from primary silver mines, as low prices and cutbacks in base metals production should reduce growth in new silver by-product output. Producers remain reluctant to hedge while official sector sales are likely to contract.

We expect the silver deficit to narrow from 45 million ounces in 2009 to 35 million ounces in 2009. Silver prices may be vulnerable to the downside should ETF demand moderate further. Demand for coin and small bars is robust, and is likely to remain so, with much of it from small investors looking for an inflation hedge.

Gold - After briefly reaching $1000/oz earlier in the year, gold prices traded below $900/oz in April. Gold came within striking distance of $1000 in early June, but eased back to near $900 by mid-July. However, now in early September gold is seriously flirting with the $1000/oz mark once again.

Gold continues to benefit from inflation-hedge purchases, as investors react to the Federal Reserve’s ongoing policy of quantitative easing and significant increases in government spending.

Repeated guarantees from Fed officials that at the appropriate juncture, the central bank will reverse easing policies, and thus head off a potential price spiral, have, so far, failed to assuage inflation fears. The possibility that commodity prices will also rise in the second half of 2009 may lend additional support to gold.

Combined gold ETF holdings rose to new records this year, but the rate of off-take has moderated in recent months, and ETF holdings are currently a bit below peak levels. Hedge funds and others are rebuilding long positions on the Comex, while the demand for coins and small bars is so strong that dealers were able to charge wide premiums for prompt delivery.

Offsetting this strong investment demand is ongoing weak jewelry off-take. Increases in unemployment and contracting discretionary income associated with the economic slowdown have severely restricted jewelry demand.

Meanwhile, high prices have had an adverse impact on emerging market demand. In particular, bullion imports into traditional importing nations such as India, Turkey, and Saudi Arabia have fallen sharply this year. The reduction in imports into the emerging world can also be explained by a surge in local scrap supply, which reached all time highs in 1Q 2009 and remains strong so far this year. Some of the growth in scrap supply is due to distress-selling from consumers willing to hand in old gold for cash.

Mine supply remains sluggish despite near-record-high prices. Producers continued to be constrained by a host of challenges including declining ore grades, a paucity of new projects coming onstream, and a lack of infrastructure.

Other forms of physical supply also remain limited. Sales from the signatories of the Central Bank Bullion Agreement (CBGA) are well under the 500t quota. Recent US congressional approval for IMF gold sales increases the chance that IMF members will agree to the sale of 403.3t of IMF gold to meet a budget shortfall and create an investment fund. Fund officials are on record as stating that any sales will take place within a third CBGA, which is currently being negotiated. The current CBGA is due to expire on 26 September 2009. IMF sales are unlikely to measurably impact prices.

While inflationary expectations remain high and are supporting gold investment demand, HSBC economists Stuart Green and Janet Henry, in Global Economics Quarterly: And now for the hard part. . . (3Q 2009) suggest that inflation will remain subdued for the foreseeable future but that commodity prices may have some further upside, based on strong Chinese demand. The US dollar is likely to weaken relative to the Euro. HSBC currency research suggests that, unlike earlier this decade, an economic recovery, should one materialize, is unlikely to support the US dollar. We believe a weaker US dollar will ultimately support gold.

Gold prices will be subject to a myriad of competing forces, including strong investor demand, potentially volatile commodity prices, weak jewelry demand, sluggish mine output, and heavy scrap sales. The interplay between these forces will likely keep gold in a wide and volatile trading rage.

Platinum - Platinum prices rallied from a low of $900 on 15 January to a high for the year thus far of $1293 on 5 June. Like gold, inflation-hedge purchases have boosted platinum ETF demand, although ETF off-take has moderated in recent weeks.

More than half of annual platinum supply is consumed by the auto industry for the production of auto catalysts and particulate filters, and the slump in world auto demand has had a noticeable impact on physical demand. Recent auto sales data hold out the promise that demand has stabilized and may be recovering, boosted by various government-sponsored incentive initiatives worldwide, including the cash-for-clunkers program in the US.

The shortfall in auto demand has been partially offset by reduced mine output as producers reacted to low prices by cutting back high-cost projects. Jewelry consumption is likely to decline as the economic slowdown reduces the demand for luxury goods, but strong Chinese demand should largely offset losses elsewhere. Other forms of platinum industrial demand, including electronics, glass, chemicals, and petroleum refining, are expected to be weak this year, in line with the global economic downswing and contracting industrial production.

We expect that the decline in auto and industrial demand will push the market into a surplus of 260,000 oz this year from a deficit of 350,000 oz in 2008. We expect a surplus despite mine cutbacks and a modest recovery in auto demand in the second half of 2009. A US listed ETF product holds out the prospect for increased investor demand.

Palladium - Palladium prices have rallied from near-record lows, below $180/oz in mid-January, to year-to-date highs of over $270 in early August. The price recovery is based largely on surging auto sales in China and signs that US auto demand is stabilizing. The US and China auto markets are made of primarily of gasoline-driven engines, which require heavier palladium loadings. The US and Chinese auto markets, together, account for the bulk of palladium autocatalyst demand worldwide.

The palladium market has been characterized by heavy surpluses for many years, but falling mine supply in both of the metal’s main producing regions, Russia and South Africa, is helping to narrow the market surplus.

Russian stockpile sales have also contributed to the ongoing production/consumption surplus. A major unknown in the palladium market is the level of remaining Russian stocks. We believe Russian exports in 2009 will decline mildly versus 2008. Any outright suspension of Russian stockpile sales could trigger a rally.

Unless Russian exports abruptly cease, we believe the market will be in surplus by about 270,000 ounces in 2009 down from a 460,000 oz surplus in 2008.

CHINA PUSHES GOLD AND SILVER TO THE MASSES

We are indebted again to Paul Mylchreest’s Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!

The report notes that China’s Central Television, the main state-owned television company, has run a news program letting the public know how easy it is to buy precious metals as an investment. The announcer is quoted as saying “China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1 kg, 2kg, and 5kg with a purity of 99.9% Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”

What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.

Around a year ago, Leyshon Resources managing director, Paul Atherley, in an investor presentation in London – and no doubt delivered elsewhere in the world too – commented that some employees at the company’s gold mining project in northern China would, on pay day, go to the local bank and buy a small gold bar as an investment and wealth protector. To an extent we put this down at the time to mining company type, but this seems to be exactly the same phenomenon noted by Thunder Road. The Chinese are being converted from being the lowest per capita gold consumers in the world to a nation of small precious metals investors. Now, by next year, Chinese consumption of gold is likely to exceed that of India, which has been for years the world’s biggest gold market. And one suspects that the potential for gold purchasing by individuals is only in its earliest stages. As more and more Chinese move into the cities and individual wealth grows, this trend is only likely to accelerate.

Paul ends the piece on Chinese gold and silver potential with the following comment: “Simply put, the Chinese government is trying to trigger a national gold craze. . . and it’s working. The Chinese public now has gold trading platforms on steroids. . . Also for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a ‘Lucky Gold’ card. I can’t even get Bank of America to open a foreign currency account.”

This may be an overstatement of the case from a precious metals bull – or it may not! Certainly if China is indeed pushing the public to buy gold then there may well be a hidden agenda there. It’s unlikely they are doing it and will suddenly pull the rug out from under millions of investors. A cynic (or a raging gold bull) would suggest that this will precede a move to switch a good proportion of the country’s reserves into gold which would have a huge effect on the global gold price and could prove disastrous for the dollar. Maybe it’s not in China’s interests to drive the dollar down too much until it has managed to divest itself of the huge dollar overhang. The country may well already be, of course, surreptitiously building its gold reserves without reporting the build-up.

If the Chinese are indeed beginning to buy gold and silver as the quoted report suggests then this has to be a strong signal that prices are going to rise, and perhaps rise dramatically, in the relatively near future. We await comment from other China watchers for confirmation of the gold and silver buying spree, but with global gold production at best flat and probably in decline, even a small increase in Chinese buying could have a substantial impact on gold and silver prices.

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