6/6/11 Weekly Market Report

A weekly review of the Precious Metal and Rare Coin markets providing information and news that affects future values.

GOLD
Last Friday Gold closed at $1,542.80, up only $6.20 per ounce for the week.  The high/low price of Gold last week ranged from $1,551.60 to $1,518.20.

Based on the news released late last week, I was surprised gold was up only $6.20.  I believe that a 3% loss in the value of the Dollar versus the Euro, 9.1% unemployment rate within the U.S., QE2 ending, and a fight over lifting the Federal Debt Limit (causing Moody’s Investors Service to potentially place the U.S. government’s debt rating on review for a downgrade), should have driven the Gold price much higher. I think these issues will cause gold to rise this week.

SILVER
Although the price of silver was down $1.44 last week, closing at $36.42 an ounce, it was surprisingly strong in the face of all the negative U.S. economic news. Remember, negative economic news can be bullish for Gold, while bearish for Silver.

The fundamental reasons for owning Gold and Silver are different. Gold is your currency hedge (deflation and inflation hedge), while Silver is primarily an inflation play.

The high/low price of Silver ranged from $38.50 to $34.90 last week. Silver staying above $34.90 for the past twelve trading days leads me to believe that the price correction should be behind us.  We continue to see extraordinary demand for physical Silver, confirmed by U.S. Mint reports of selling 3.65 million ounces of American Eagle silver coins in May 2011, up 30 percent from April. The U.S. Mint total production for Silver 1oz Eagles so far for the year is 18.9 million ounces. Current U.S. Mint production levels are tracking to a record year for Silver Eagles, plus they are four weeks behind in deliveries.

Let me address the possibility of an additional Government Quantitative Easing Stimulus program (QE3), which will have a direct effect on values of precious metals and rare coins.  

Brief History

QE1 - On March 18, 2009 the Federal Reserve said it would spend an extra $1 Trillion to resuscitate the recession-hit US economy, including buying billions of dollars of government debt in the drastic policy of "quantitative easing". 

March 18, 2009 Precious Metal Price quotes; Gold $893.25 an ounce   Silver $12.61 an ounce 

QE 2 On Nov. 3, 2010 America’s central bank announced that it would pump an additional $600 Billion into the ailing US economy over the next eight months in an attempt to accelerate growth and cut unemployment. Hopes of a fresh $1 Trillion boost to activity were dashed, although the Fed did announce that the $600bn injected would be topped up by around $250bn of re-invested assets, mainly mortgages.

Nov 3, 2010 Precious Metal Price quotes: Gold $1,345 an ounce Silver $25.02 an ounce

Last week’s poor U.S. economic news has focused the attention of the financial press on what would be needed to stimulate the economy by 2012, an election year. Whether it comes from the Federal Reserve or the Obama Administration, I know a QE3 type program is coming soon.  Incumbent U.S. Senators, Congressman, and the President realize that the economy is going to be the prime issue for the 2012 elections. It’s virtually impossible to be re-elected with issues like negative job growth, widespread foreclosures, and surging energy and food prices.

The easiest route would be for the Federal Reserve to add another $1 trillion to the system by buying government debt and mortgaged back securities. They could also provide more liquidity for financial institutions with the focus on residential loans that are in default. Federal Reserve Chairman Ben Bernanke said in May 2011 that after QE2 ends in June, he would prefer not to implement another round of easing as it would create additional inflationary risk. However, he conceded that the Fed policy board would reconsider its position if there was a significant decline in the economic outlook.

If the Federal Reserve doesn’t take any action it would be up to the Obama Administration. Considering the current Congressional makeup, the real question to answer is what would an Obama Administration stimulus program look like? Both sides of the aisle need to have their needs met to reach a compromise.

Here are the top seven items on the agendas:

The Obama Administration wants to:

1. Encourage business investment and expansion.
2. Give the private sector incentives to increase hiring
3. Provide lower Payroll Taxes
4. Streamline Government Regulations
5. Give tax relieve to the lower and middle-class workers
6. Invest in “green energy” including wind and solar.
7. Have the Government automatically calculate federal income tax each year, saving working families billions of hours of paperwork.

Republicans want to:

1. Provide an expansion of the Bush Tax Cuts
2. Lower the Capital Gains rate
3. Sizeable cuts in the Federal Budget
4. Give large corporations the ability to repatriate cash held oversees with little to no tax burden.
5. Extent Business Tax cuts
6. Provide tax incentives to add jobs for corporate expansion within the U.S.
7. Increase Free trade agreements

Timing

If the Federal Reserve takes the action, I believe it will happen soon, within the next month. If it’s the Obama administration, the new legislation should be proposed by the time Congress returns from the Labor Day recess in September.

Regardless of what the ending package looks like it will be very bullish for precious metals and rare coins immediately, as seen above with price increases resulting from QE1 and QE2. Plus, commodity and food prices should continue to increase globally in the face of a devaluing U.S. Dollar.

U.S. Rare Coin market

I just returned from the Long Beach Coin Expo, a major rare coin convention with thousands of dealers, collectors, and investors attending.  Trading activity was excellent, with a clear shortage of certified high quality U.S. investment grade rare coins.  In conversations with many of my peers, it was made clear that demand for gold and silver bullion coins has been heavy for the past five months. Meanwhile, U.S. $10 and $20 Gold coins and U.S. Silver Dollars are great values at current market prices, but with little availability. The Hottest items at the convention were Chinese gold and silver coins dated before 2000.