Rust Rare Coin, Inc. September, 2008

PRICE TRENDS (New York closes)

IN OUR OPINION. . . .

At present there are supply concerns in both gold and silver. We are seeing high premiums and shortages that we have not seen in decades. With the House failing to pass the initial bailout, significant questions remain unanswered. Regardless of what type of bailout band aid is created, it should be evident to everyone that this is a process that is going to take some time. Hopefully new regulations will not allow struggling companies to pay CEOs exorbitant wages while the company is on the verge of bankruptcy. However, banks and financial institutions that have been prudent and used conservative financial practices are sound. But these market corrections are definitely going to affect us all. Precious metals, we believe will continue to be in the forefront of safe haven investing.

One thing that we are looking at closely: platinum has had a significant correction. We are now putting platinum more solidly in the investment mix with gold and silver. For the past few years platinum has been too high; but with platinum currently trading within roughly ten percent of what gold can be purchased for, we feel it has some advantages again.

If you feel your portfolio is still heavy in paper, and with the corrections we have seen in the last month or so, it’s not too late to reevaluate and put more of your assets into precious metals.

 

MARKET FOCUS, EMERGING TRENDS

James Steel, Analyst, HSBC Global Research

The US Senate’s approval of the financial rescue bill and Massachusetts Rep. Barney Frank’s comments on CNBC, that “economic realities” had begun to set in and might sway some lawmakers in the House of Representatives to approve the package, weighed on gold prices, we believe. Continued investor flight into cash instruments with yields on US government securities falling notably, also supported the US dollar and weakened gold. The US dollar received additional support from comments by European Central Bank President Jean-Claude Trichet that factors in the real economy would reduce the risk of inflation in the euro zone. Economic commentators at Reuters and Bloomberg interpreted Mr. Trichet’s comments to mean that the ECB may cut interest rates in the near future.

The strong US dollar rally, combined with a further flight to cash, sapped precious metals prices. Another important factor driving bullion lower may be ongoing liquidation by hedge funds and others who continue to face tightening credit conditions. That said, to some extent the selloff in the precious metals is hard for us to justify. Tight credit spreads and the pronounced moves to cash and near-cash instruments acted to support bullion prices earlier in the summer. A marked difference between that period and the current climate may be the steep drop in the broader commodity complex, notably energy and base metals, and increased prospects for slower economic growth. Lower commodity prices and weak economic output are sometimes associated with deflation. Should the economic downturn associated with the credit crisis ignite enhanced deflationary concerns, gold prices may weaken further.

The White House said on Thursday it was “fairly optimistic” that the House of Representatives would pass the $700 billion financial rescue bill on October 3. This sense of optimism played an important role in undermining gold prices, we believe. That said, the White House also issued a statement warning that even if the rescue package was passed on October 3, it would be weeks before the process was put in place to start buying any bad debt. Even assuming swift passage of the bill, there is room for investor disappointment if the process of buying the debt is viewed as being slow off the mark. A renewed sense of investor disappointment about even a hint of delay could trigger a fresh round of buying in gold, we believe. Should the House reject the rescue package a second time, the gold market could become the focus of renewed safe-haven buying. The majority of political commentators on CNN, CNBC, and MSNBC predicted that the bill would win House passage the second time.

The PGMs were still laboring under the impact of auto makers’ grim vehicles sales figures for North America released at the end of September. The slump in auto sales is undeniably a negative for platinum and palladium demand, but we wonder whether the plunge in PGM prices is fundamentally justified. We point out that the price differential between spot platinum and spot gold has fallen to about $130/oz, and thus spread traders and other traders may begin to find platinum attractive at current prices. The last time platinum traded below $1000/oz was in the Q4 2006. In that year, platinum ran a significant production/consumption surplus of 355,000 oz. by our calculations. While the current supply/demand fundamentals are clearly less supportive than they were earlier this year, we do not believe they resemble the large oversupply in 2006.

 

SILVER

The iShares Silver Trust exchange-traded fund (ETF) achieved a major milestone in July as it crossed over the 200 million ounce threshold. Launched in April of 2006, this investment vehicle, trading on the American Stock Exchange under the symbol SLV, has proven in just two years to be one of the market’s most successful commodity ETFs. It has made investing in silver more convenient because a grantor trust holds the metal on behalf of the investor. This gives the investor exposure to the market without having to take physical delivery and thereby having no storage, insurance or assaying costs.

GOLD

From Bloomberg.com

By Marianne Stigset, 10-1-08

Gold rose in London as a weakening dollar and speculation of a deepening global financial crisis increased the metal’s allure as an alternative asset. The dollar fell from close to a two-week high against the euro on speculation the US economy will enter a recession regardless of whether Congress approves the Bush administration’s $700 billion bank-bailout proposals.

Gold has a correlation of 0.67 to the euro-dollar exchange rate this year, up from 0.58 last year, Bloomberg data show. A figure of 1 would mean the two move in lockstep.

“You wouldn’t want to give up gold if you had it,” said Mario Innecco, a futures broker at MF Global Ltd. in London. “Things are not well.” Gold for immediate delivery climbed $5.55 or almost 0.6%, to $876.50 an ounce as of 12:28 p.m. in London. “Gold is an indication of how things are going and central banks are trying to put some ice on the thermometer,” keeping gold prices down, Innecco said. “Eventually it will burst out and go up to $1000 an ounce quite easily.”

Global financial institutions have posted $590 billion of losses and write downs since the start of last year following the collapse of the US subprime-mortgage market. The losses led to a credit squeeze that caused banks including Lehman Brothers Holdings Inc. and Washington Mutual Inc. to fail last month.

Gold refineries can’t make enough bars to keep up with the demand from investors, the Financial Times reported, citing Jeremy Charles, chairman of the London Bullion Market Association. The situation is unprecedented in Charles’s 33-year career, the newspaper reported him saying. Some investors are paying $25 an ounce above the spot price to get bars, the Financial Times cited an unidentified banker at an LBMA meeting in Japan as saying.

“To buy gold now you would have to pay a lot more than the price you see on your screen,” Innecco said. “More and more people are buying gold coins and bars.”

Investment in the SPDR Gold Trust, the biggest exchange-traded fund backed by bullion, advanced almost 3.1 tons to a record 755.3 tons on Sept. 30, according to figures on the company’s website. That would rank the fund eighth worldwide when compared with central bank holdings, according to data from the World Gold Council.

“With interbank rates continuing to rise to new record levels, systemic risk remains elevated which will support gold,” brokerage Gold and Silver Investments Ltd. in Dublin said in a report on Oct. 1. Banks are being squeezed because of a surge in borrowing costs as lenders hoard cash on concern more financial institutions will fail.

PLATINUM

From Bloomberg.com

by Halia Pavliva, 9-30-08

Platinum and palladium tumbled, capping the biggest monthly and quarterly declines ever, on concern that demand for the metals used in auto parts and jewelry will dwindle because of a shrinking US economy. The US may face its longest recession in a quarter century, no matter what action Congress takes on the government plan to rescue the battered banking industry, some economists said. Platinum and palladium lost about half of their value in the third quarter.

“We see a continued weak global economy,” Miguel Perez-Santalla, a sales vice president at Heraeus Precious Metals Management in New York, said in a note to clients. “The metals will continue to look weak.”

Platinum futures for January delivery fell $56.40 or 5.2%, to $1028.50 an ounce on the New York Mercantile Exchange. Earlier, the price touched $1000.10, the lowest for a most-active contract since Feb. 16, 2006.

Platinum fell 50% in the third quarter and 32% in September. Platinum had been at a record $2,308.80 on March 4, 2008.

Platinum and palladium are used to make emissions control components for gasoline and diesel engines. Auto sales in 2008 are headed for a 15-year low in the US, the world’s biggest market. Platinum use by carmakers accounts for more than 60% of global consumption

“Platinum and palladium will fall in line with other industrial metals,” Jeffrey Christian, a managing director at CPM Group in New York, said on Sept. 29^th in an interview on Bloomberg television. “People are going to look at the overall economy and say it’s weakened and getting weaker, and the government is not doing anything to help solve those problems.”

Some investors buy platinum and palladium as a hedge against inflation. In the third quarter, the Reuters/Jefferies CRB Index of 19 raw materials is down 25%, the most ever, after posting the biggest first-half gain in 35 years.

Both metals “suffer at the hands of companies liquidating assets to shore up their capital base in the face of tougher capital markets,” Perez-Santalla said.

Platinum supply will swing to the largest surplus in 10 years from a deficit as demand declines, Paul Walker, chief executive officer of London-based research company GFMS Ltd., said.

“We estimate it’s going to be about 200,000 ounces of surplus this year, and possibly larger,” Walker said in an interview in Kyoto, Japan.

OPTIMISM OVER PLATINUM METALS DESPITE PRICE DROP

Business Day (Johannesburg)

Demand for nickel and platinum group metals would be underpinned by the steel and engine catalyst sectors, but commodity markets would remain challenged in the coming year, Braemore Resources chairman, David Humann said yesterday. Braemore, which took a secondary listing on the JSE two months ago, is testing technology to treat tailings containing nickel at Leinster in Australia and scaling up its test plant to treat platinum group metals in South Africa.

Platinum group metals’ prices tracked gold weaker in a response to the US government’s market bail-out package, with platinum trading at $1017/oz and palladium shedding over 1% to $218/oz.

But Humann said China and India continued to need steel to build infrastructure, and nickel would also be needed. Although fears that a US recession would affect the automotive sector had hit the platinum price, new uses for the metal in electronics, especially cell phone technology, would sustain global demand.