Weekly Market Report 11/28/11

GOLD

The lack of agreement on a unified monetary policy between the European Financial Ministers and the Central Bankers has driven down the world’s equity, energy, commodities, and precious metal markets in the last two weeks.  The uncertainty of the past two weeks caused Gold to drop only $100 per ounce (5.9%) with no change in the bullish fundamentals. Gold closed at the low end of the trading range, a real bargain price of $1,685.70 per ounce last Friday.

Global investors are selling equities, bonds, commodities, Euros, and precious metals to prepare for margin calls and build up U.S. Dollar cash reserves. Almost $12 trillion was wiped off the value of global equities since May over mounting concerns about sovereign debt default and slower global growth. Key European nations are having their credit ratings lowered, while their interest rates on their debt have doubled in the past month. Many European banks and investors are exchanging billions of Euros into U.S. Dollars to escape these looming problems and to provide them with liquidity if the crisis worsens. Our Federal Reserve has reported that foreign banks have deposited more than $715 billion, which is more than double the $350 billion held since the end of 2010.

As investors run away from stocks, bonds, and the Euro, they want safer assets like Gold and U.S. Gov’t Treasury securities.  U.S. treasury’s interest rates have fallen to near-record lows (under 2% for 10-year gov’t bonds) while gold is heading towards its 11th consecutive annual gain, averaging over 20% compounded annually.  This is why the holdings in exchange-traded products backed by gold reached a record 2,350.8 metric tons on Nov. 23, and are now valued at $127.6 billion.

I believe the trading activity in the gold market is telling us we are going to be seeing much higher prices by year end.

SILVER

Silver again followed gold by dropping $3.67 (11.8%) in the last two weeks, closing at $31.02 per ounce on Friday.  As I have mentioned frequently, the value of Silver is more dramatically affected than gold by indications that a serious global recession is on the horizon. My explanation of what is happening in the European countries is very scary when combined with the recent Reuter’s report that the financial contagion from Europe is pushing global economies toward the brink. The risk of slipping into a worldwide recession is rising significantly. China’s exports have plunged to half of their year-ago levels. Factory orders in Germany, Europe’s economic powerhouse, are slumping as China weakens. Australia and Indonesia have cut their interest rates to ward off damage from Europe, while Japan, Britain and Brazil have slashed their growth forecasts.

Canadian billionaire Eric Sprott has filed for the purchase of $1.5 billion in Silver bullion to cover an expected demand for his Sprott Asset Management’s silver ETF. A $1.5 billion silver purchase will require about 45 million oz of silver. Such a large purchase has normally led to higher prices. Sprott’s $580 million silver purchase in 2010 was accompanied by an almost 175% gain in COMEX Silver when prices surged from $18 to $49 per ounce.  This current purchase of $1.5 billion is almost 3 times the size of the 2010 purchase and as such could spur a sizeable increase in prices again.

Because I believe we are going to see a sizeable increase in the price of gold by year end, and the possibility of a recession still exists, I am lowering my recommended percentage of silver (see “Investment Diversification” below) until we get better indications of quantitative easing and stimulus programs expected from the European Financial Ministers and Federal Reserve.

Recommended investment commitment and diversification: 

Precious Metal commitment: Minimum of 35 % of investment capital

Diversification:  Gold 75%, Silver 20%, Platinum & Palladium 5%

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

What do I think is going to happen this coming week with Gold & Silver?

It looks like Eurozone leadership and the IMF have decided to take aggressive action over the weekend.  They have finally recognized the need to stabilize the debt problems of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) countries and calm down the global financial markets.

Over the weekend:

A credible report in an Italian newspaper suggested that the International Monetary Fund (IMF) with the ECU were preparing a rescue plan for Italy worth up to 600 billion Euros.

A draft paper from the European Commission has suggested that gold could be used as collateral for new Eurobonds. The rationale for any central bank holding gold is straightforward. Gold can be used as a source of capital if a currency is not redeemable or if a country falls out of favor with the international capital markets. Both India and Korea have used gold as collateral in the last 15 years. China would be more willing to buy ECB debt if it was backed by Eurozone Gold.

Within the next few days, France and Germany will offer up a fast-track plan to jump start the problem eurozone nations. This plan will provide economic governance, austerity programs and fiscal discipline, giving the European Central Bank confidence to aggressively intervene in the sovereign debt markets when they deem appropriate.

Eurozone finance ministers announced that they will meet on Tuesday and give detailed operational rules for the region’s bailout fund - the European Financial Stability Facility - ready for all to approve. The approval would pave the way for the 440 billion euro facility to draw cash from investors.

Look for higher prices this coming week for equities, commodities, energy, gold, silver, platinum, and palladium based on anticipation that the IMF and ECB will take aggressive actions soon. The value of the U.S. Dollar should fall versus the Euro, which will help precious metals move higher.

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