Weekly Market Report 8/29/11

GOLD

During this past week Gold and Silver showed us all just how volatile it can be. Monday, Gold closed at $1,891.90 per ounce up $132 from the previous week’s close, setting the stage for hitting the new all-time high of $1,912.80 early Tuesday morning.  Wednesday, gold closed down $104 per ounce and Thursday gold dropped to $1,701 on heavy trading before recovering to close at $1,763.20.

Friday was totally unexpected. Professional floor traders shorted the gold/silver markets after Federal Reserve Chairman Bernanke spoke, omitting any new quantitative easing programs. Thinking that gold had established a new $1,700 to $1,800 trading range, many professionals and day traders shorted right after the opening price of $1,780. They placed their stop loss trades at $1,801 in order to limit their risk. Then in after-market trading, a large amount of buy orders came in to the gold market and drove the market up to $1,802, which caused the stops to be executed, driving the gold price up to $1,830 at the close of the weeks trading.  We saw the trading volume almost double last week on extraordinary volume, considering that we are in the month of August. With this much volatility and record volume, the professionals and day traders will think twice about shorting gold again.

SILVER

The volatility in Silver during this past week was also exceptional. Silver had a $5.50 trading range, from $38.76 on the lows to $44.28 on the highs. Silver closed under $40 only one day of the five day week, and therefore we are seeing support at the $40 price level. Volume of contracts traded during the week was heavy; almost double the previous week’s volume. The popular Silver to Gold ratio has gone to 44 to 1, favoring owning Silver. 

Gold and Silver – The Bullish Season

For more than a month I have been talking about my surprise at seeing Gold’s sharp price increase during the month of August. Gold is usually very quiet in August and normally starts to rally in September. I have gone back six years to show the statistics on how gold and silver have performed from September 1^st to December 31^st of each year.

Silver shows a 4 month average increase from Sept 1^st to Dec 31^st of 17.31%. The results of these calculations are surprising considering that Silver was down 20.54% in 2008, (the year when our financial crisis drove down all commodities, and the precious metals were also down substantially, except for gold.)

Gold shows a 4 month average increase from Sept 1^st to Dec 31^st of 12.71%.  If Gold is trading at $1,800 on September 1^st, this would take my projection to $2,028 per ounce by year end.

PLATINUM & PALLADIUM

The price of Platinum is virtually the same price as Gold, yet it is 30 times scarcer. Demand is starting to go up in Asia. Japanese investors have been steadily boosting their platinum investments for the last month. Tempted by the precious metal’s stability relative to Gold, they look to diversify their commodity holdings since global markets are currently in turmoil.  A popular New Platinum bullion product available now is the Australian Platypus . We offer this Platinum investment coin at only 5.5% over the spot price.

This Week’s recommended investment commitment and diversification: 

Precious Metal commitment: Minimum of 35 % of investable capital

Diversification:  Gold 50%, Silver 35%, Platinum & Palladium 15%

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

The Different Psychologies of Investing

Duing the past week I have received numerous calls from clients.  Two of these calls clearly point out a basic investor psychology…

The first call came from a new client who purchased gold from my firm on Monday, August 1st when gold was trading at $1,621 per ounce. The client had been on a boat cruise and tour of Asia and had returned home late Thursday, August 25th.  During the cruise he had spoken with his wife about investing and wanted to purchase more gold. When he called on Friday the 26th, gold was trading at $1,821 per ounce, almost $200 per ounce more than he had paid three weeks prior.  He was reluctant to make a new purchase, but decided to move forward anyway after I told him that gold did reach $1,912.80 per ounce the prior Tuesday (Aug 23rd.)

The second call was on Wednesday, Aug 24th with gold trading at $1,755 per ounce.  The client knew that gold had reached $1,912.80 on Tuesday morning, and was upset because he had lost over $150 per ounce in one day. An interesting statement considering that his average cost was less than $800 per ounce and the gold is part of his long term IRA investment account. He had never given me any indication that he was interested in selling his gold.  I explained that the fundamentals for owning gold hadn’t changed and that this is Phase II volatility. Having a copy of my 24 page Hyper-inflation booklet I pointed out the page that explains this type of price volatility. (I am in the process of updating the Hyper-inflation booklet, based on your input. Thank you, and I hope to have the revised version ready to go out by Mid-October.)

On Saturday I took time to think about the psychology of both calls.

The first call was easy to understand since nobody wants to buy at the market high. Learning that the gold market had actually been $90 higher allowed this client to complete a transaction.  If any client tells me he/she wishes to buy or sell at a price point, David or I will contact them when that price point is reached.

As for the second call, I feel that this client thought that he had missed the opportunity to sell when gold was at $1,912 per ounce. This, too, can be remedied by sharing with us any buying or selling price points so you can be contacted when those price points are reached.  

For the record, I don’t believe in setting buying or selling price points because they are rarely executed. I remember all the clients I spoke with in 2009 that wanted to sell their gold at $1,000 per ounce. When it reached that price, I contacted 24 clients; nobody sold.  In 2010, when gold was trading at $1,200 per ounce, I spoke to clients who wanted to buy if gold got down below $1,000 per ounce again; needless to say, those clients are still waiting.    

There are many excellent reasons to buy or sell gold and silver without setting a price point.

Some of the reasons to BUY precious metals:

1)      Part of a monthly or yearly accumulation program

2)      To build up investment diversification of precious metals to 35%

3)      Placing precious metals in retirement accounts

4)      Building an investment quality rare coin collection as part of a family wealth preservation program

5)      For a price averaging strategy

Reasons to SELL precious metals:

1)      To use the funds for personal reasons

2)      To take some profits off the table

3)      To take advantage of a Silver/Gold or Platinum/Gold switch

4)      To complete a like kind trade for a tax advantage.

5)      The demand/supply fundamentals become bearish

As in the past, when we see that the fundamentals for owning gold and silver are changing, David or I will contact our clients.  Some of my long time clients may remember the faxes and phone calls I made in January 1980.  In January of 1980, I tried to contact over 200 clients advising them to lighten up and take some profits when gold hit $700 (up 40% in 20 days) and Silver was up 400% in 4 months due to domestic panic buying. Gold was increasing at an extraordinary pace following what we felt to be a cornering of the Silver market by the Hunt Brothers. In two days I faxed and called over 200 clients. Most felt that silver was on the way to $100, and gold would hit $1,000 per ounce soon, and that they didn’t need to sell.  If you remember, interest rates were climbing to above 15% at that time. Less than 5 clients sold before Silver and Gold topped out at $50.35 & $852 per ounce respectively four days later. Gold did fall back to $485 and silver to $11 within a few months.

The point to take away from these examples is to allow yourself flexibility in your target price and give yourself the opportunity to adjust your price if market conditions warrant an adjustment. Often times, people can hurt themselves financially when they don’t allow themselves the option to adjust their price points. Price points are a much better indicator of when to examine the markets, than of when to actually buy/sell. The best strategy, and what we recommend for our clients, is to look at the current market activity and determine a good time to buy/sell based on the current conditions.

That said, both gold and silver are showing strong support levels at their current prices, which means it is a great time to buy. Some people may wait for the absolute bottom, but then again, those are usually the same people that are still waiting for gold to hit $1,000 an ounce and missed a 75+ percent return on their investment!

What did Bernanke say?

On Friday August 26^th in Jackson Hole, WY, Federal Reserve Chairman Bernanke gave an economic update. He said that the U.S. Central Bank still has tools to stimulate the economy, without providing any details or signaling when or if the policy makers might deploy them. While Bernanke wanted to reassure investors and the public that U.S. growth is safe in the long run and that the Fed still has the tools to help the recovery as needed, he did not indicate that the Central Bank would start a third round of quantitative easing at this time. Initially, Bernanke’s comments were interpreted by both the Stock and Precious Metal markets as bearish, but in reading the fine print it gives a strong indication that if the White House and Congress cannot stimulate the economy with new fiscal policies, the Federal Reserve will then take the needed actions at the expanded September meeting. I think that the White House wanted the Federal Reserve to initiate a QE3 program to promote growth and mortgage lending, while giving financial markets a boost; knowing that it would weaken the dollar against the Euro and hoping it would not look like it was politically motivated.

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.