Weekly Market Report 8/15/11

GOLD

Last week was another extraordinary period for gold. Up $90.80 (5.5%) in just five trading days, gold closed the week at $1,742.60 on the heaviest trading for the month of August I have ever seen. Average volume was over 300,000 contracts a day, which is astonishing considering this is historically the weakest time of the year for gold trading. Another all-time record of $1,817.60 per ounce was set during overnight trading early Thursday morning in Asia.  I was watching the market when gold hit that record level and buying dried up and normal profit taking set in. As gold started the correction there was good resistance at $1,800 and when that level didn’t hold, the market dropped back to $1,740 before the strong buying came back.  Outside of some major financial news I expect Gold to stay in the $1700 to $1780 trading range for the rest of August, or until Obama shares his new government economic stimulus programs or QE3 is announced by the Federal Reserve.

During my work week, when I am using the computer at my desk I have my television tuned to CNBC to hear the occasional news bulletin that would affect precious metal trading. On Monday, Tuesday, and Wednesday of last week when gold was continually setting new all-time highs, every analyst and fund manager that I heard interviewed was asked about Gold. All of them were either very bullish or stated that they own gold.  On Thursday, after gold hit $1,817.60 in overnight trading and started coming down from the highs, the analysts and fund managers interviewed were talking about the gold bubble and why they are waiting until gold drops to $1,500 or less to buy.  The latter was music to my ears, as I have heard the same type of ‘wait for the correction’ and ‘bubble’ talk since gold broke above $500 an ounce in 2005. However, they never address the supply or demand side fundamentals, they just think it has moved up too fast and needs to come down.  Since gold was $256 on April 2, 2001 it has been in a bullish uptrend. However, we have since seen corrections ranging from 4% to 12% and then returning back to set new highs within three to eight months. During this 10 year run, the supply and demand side fundamentals have continued to get better and better showing increasing demand and decreasing supply. Until I see a crack in these fundamentals, I will stay bullish.

SILVER

This was a very interesting week to watch silver trading. On Monday Silver started moving with Gold, up $1.17 for the day and hitting $40.40 as gold was setting record highs. However on Tuesday, as gold continued higher and was up $30 per ounce, Silver turned lower, dropping $1.50 on the highest volume trading for the week. From Wednesday to Friday Silver traded between $37.61 and $39.86 per ounce in active trading.  Silver did close up $0.90 for the week at $39.11 per ounce. The message the Silver market is sending is that the factors that are driving up Gold (i.e., loan default, downgrade of U.S. debt, lower interest rates, and volatile stock markets) aren’t bullish for Silver. Even with a 44 ½ Gold to Silver ratio, what Silver needs to move higher is inflation news or at least the prospect of higher inflation in the near future.  The next announcement of a U.S. monetary easing program will be the signal we need to get overly bullish on Silver, see below for more timing estimate.

This Week’s recommended investment commitment and diversification:

Precious Metal commitment: Minimum of 35 % of investable capital

Diversification:  Gold 75%, Silver 25%

Diversification includes long term investment quality rare coins and short term bullion products.

RARE COINS REPORT

I am writing this report from Chicago as I am attending the largest rare coin event of the year.  The American Numismatic Association World’s Fair of Money Convention will start Tuesday August 16^th.  For the past few days I have been attending the Professional Numismatist Guild’s (PNG) trade show while attending Board and membership meetings. I have proposed to my fellow PNG Board of Director members that we fund a major consumer protection advertising and public relationship program, and I received the support to put together a plan. With the hundreds of new Gold, Silver, and Rare Coin companies that have started up within the past 2-3 years it is scary out there with all the misleading statements and promises, and deceptive practices and guarantees.  The new gold/silver and rare coin buyers need help to separate the credible companies from the fraudulent ones. 

Back to the rare coin activity at the Chicago convention...  Trading on the show floor is active with coin dealers reporting heavy demand for Silver and Gold rarities.  Thursday and Friday’s rare coin auctions were higher than expected, with total sales over$ 30 Million and this is only the first of three auctions being conducted. Many of the European dealers are reporting low supply of popular European gold coins as Europe’s banks are seeing extraordinary demand in Great Britain, France, Spain, Portugal, Italy, and Greece from the public wanting to trade in their Euros for the gold.

Trying to understand the Federal Reserve Open Market Committee’s statement

On Tuesday August 9^th at 11:20am PDT the FOMC statement ( http://www.mintstategold.com/investor-education/cat/news/post/fed_market_statement/  ) was released. Immediately after the release I went to school, watching the stock and bond market professional digest, interpreting, then reacting to the statement. Trading in the Stock, Bond, Currency & Gold Markets were all highly erratic after the announcement.  When the FOMC statement was released the DJIA was up 90 points and within 1 hour and 40 minutes it dropped 290 points, then rallied back to end the day up 429 points. At the same time, gold was trading at $1,745 and rallied up to $1,779, and as the stock market rallied, gold sold off to $1,757 by the close of the stock market.  Short term bonds and the Swiss Franc rallied sharply higher.

I understand why the FOMC statement caused the markets to react in an erratic matter, as I found many Fed policies to be puzzling or outright confusing. However, after reviewing the statement there are three main Federal Reserve quotes that are the most meaningful. The FOMC said they would “discuss the range of policy tools” to strengthen growth and are “prepared to employ these tools as appropriate” while pledging to keep the benchmark interest rate “near zero until at least mid-2013”.

QE1 and QE2 injected $2.3 trillion into the economy, and the FOMC stated that the results “were considerably slower than anticipated.”  I believe that Bernanke will propose a QE3 as the economic data worsens, regardless of the criticism he will certainly receive.  The August 26^th Federal Reserve meeting scheduled for Jackson Hole, WY is an excellent platform to make that announcement. During last year’s meeting at Jackson Hole the Fed announced QE 2 which was the purchase of $600 Billion in Treasuries. 

The FOMC Statement last Tuesday clearly leaves the door open for further asset purchases (QE3) because the central bankers have downgraded the status of our economy.  Since the last FOMC meeting in June, the Commerce Department said the economy grew 1.3 percent in the second quarter of the year. The government lowered its calculation of first-quarter growth from 1.9 percent to 0.4 percent. The economy added an average of 72,000 jobs a month since May, according to the Labor Department, compared with an average of 179,000 in the first four months of 2011. QE3 needs to focus the quantitative easing in the areas of housing and employment stimulation. If coordinated with Obama, a soon to be announced economic stimulus plan could get the economy moving before next year’s elections.

J.P. Morgan’s Steve Lear likened Bernanke to a golfer who would rather send the ball past the hole than strike it too softly. “You’re not going to come up short on your putt,” said Lear, deputy chief investment officer for global fixed income in New York. “He is not going to leave the fight against deflation short.”  

 All statements, opinions, pricing, and ideas herein are believed to be reliable, truthful and accurate to the best of the Stuppler & Company’s knowledge at this time.  Stuppler & Company disclaims and is not liable for any claims or losses which may be incurred by third parties while relying on information published herein.  Individuals should not look at this publication as giving finance or investment advice or information for their individual suitability.  All readers are advised to independently verify all representations made herein or by its representatives for your individual suitability before making your investment or collecting decisions