Weekly Market Report 10/10/11

GOLD

Last week was calm compared to last month. Gold was up $13.50 for the week, closing at $1,635.80 per ounce on respectable volume.  The European sovereign debt and banking solvency problem remains on the forefront of news and is affecting the world’s precious metal and equity markets. (Read more details below) Eurozone nations and bank debt downgrades kept coming all week from Moody’s, Fitch, and Standard & Poor’s rating agencies. The debt downgrades of 12 British and 9 Portuguese Banks, along with Italy and Spain, caused a late selloff in Gold and Silver last Friday.

Gold stayed within the $1,597 to $1,680 (5.1%) trading range last week and its volatility seems to be settling down. The volatility could pick up this week and we could see Gold hit $1,700 per ounce as we see positive news from the Eurozone today. Plus, the U.S. initial jobless claims, China’s producer price index, and the US consumer price index data will be released later in the week.

It’s become clear to me that August 2011 was the start of Phase II of the current bull move in Gold. The increasing price volatility in August and September were a dead giveaway. From January 2011 to July 2011, the gold market did not move up or down more than $40 per ounce in a single trading day.  In August 2011 we saw three days with a $40 move and one day with a $100 move; September 2011 had seven $40 days and one $100 day.  The sharp price surge in the summer and this increased volatility show that despite the dramatic correction in September back into the $1,600’s, we have begun Phase II of the current gold bull market and it could last for 3 years.

SILVER

The US commodity exchange showed Silver closing at $31.00 on Friday, up $0.90 for last week. The high/low for the week was $32.85/$28.43, that’s a 15.5% range compared to the 5.1% for gold. Silver needs to build a base over $30 per ounce for a little while to increase long term confidence.

Silver continues to send mixed signals.  How can we have a 35% correction in September when the US Mint sales show a record 4 ½ million ounces of Silver Eagles sold? At this current pace U.S. Mint sales will easily go over 35 million 1oz Silver Eagles in 2011, making it an all-time record sales year. U.S. 1oz Silver Eagles are just one of five very popular modern issued silver bullion products. Investor demand and total consumption for 2011 should be an all-time record. Since the supply side of this equation has not increased dramatically, why is the price of silver virtually unchanged since the first of the year?  Compare how Silver’s price performed against Gold, which is already up 15.2% for the year.

This Week’s recommended investment commitment and diversification:

Precious Metal commitment: Minimum of 35 % of investment capital

Diversification:  Gold 66%, Silver 24%, Platinum & Palladium 10%

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

Trying to understand the European Debt Problem

The sovereign and bank debt crisis in Europe is having an effect on the price of precious metals on a daily basis.  While I was in Europe two weeks ago I got a basic understanding of the problem, and I spent much of my time this past weekend updating myself on the status of the crisis. 

The problem: At this point in time, the Eurozone has about 3 Trillion Euros in sovereign and bank debt that is considered to be at risk of default. Over 90% of this debt is held by the Eurozone banks. The PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain) have about 1.5 trillion Euros in debt maturing within the next year; if those bonds are not paid off, the countries will be in default.

What is the current status of the problem?  German chancellor Angela Merkel and the President of France, Nicolas Sarkozy, met this weekend in Berlin. After two days of discussions they finally reached an agreement on most of the key issues. They promised to release a 5 point comprehensive package to stabilize the Euro and sweeping recapitalization of the European banks, by the end of this month.  This plan will be delivered to the Group of 20 Summit on November 3rd.

While the meeting was going on, the first major victim of the crisis was announced. The Dexia’s Belgian banking business will be nationalized. The Governments of Belgium, France, and Luxembourg will guarantee 90 billion Euros of their assets.

With sovereign European nations willing to nationalize problem banks and guarantee assets, the landscape has changed.  Europe’s largest banks, with a sizeable portion of their assets in toxic debt, will now aggressively try to boost their liquidity from the private markets, or request recapitalization from the central bank, before they are forced to write off a substantial portion of their bad debt. Now, with a solution to the banking debt crisis on the horizon and the fear of a liquidity crisis behind us, investors will return to precious metals and the U.S. Dollar should fall in value versus the Euro.  Shortly after the ECU announcement Sunday night, Gold rallied $18 per ounce, and Silver increased $1 in the Asian markets.

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