Rust Rare Coin, Inc. April, 2009

PRICE TRENDS (New York closes)

IN OUR OPINION. . . .

Over the last few months we have certainly seen a lot of changes--some only expressed and some implemented into the economy. There is a lot if discussion among analysts about what the end result will be especially when it comes to the amount of new money that is being pumped into the economy and its inflationary concerns. We are also seeing nearly as many articles on deflation. It is safe to say that the race is between inflation and deflation and the question is which will win. Our question then is “What is the role of precious metals, once the winner is determined?”

The metals markets have been and probably will continue to be very volatile as this race is being run. In the long-term inflation will win out, because at some point prices will bottom and stabilize and buying power will be less because of the amount of currency that is being pumped into economies not only here, but also around the world. At that point those who hold metals will have a much more stable portfolio than those who don’t. With so much concern over paper assets and the time table that people feel it is going to take for those markets to truly correct and start moving in a positive direction, precious metals become even more important in balancing a portfolio as well as easing concerns of liquidity and negative diversification.

We are starting to see delivery schedules for metals become more regular. Premiums seem to be fairly stable, although they are still high.

Some of the questions we are being asked have to do with supply and demand. If metals are in short supply, why are mines closing down? We are seeing the effect of low metals prices during the 1990s in many of the mining sectors. During that time companies were not putting resources into research and development, leaving many mines working in lower productivity areas. Also the cost of doing business over the past few years has increased which is causing many mines to struggle even further to be profitable. Mining production costs are figured in local currency, yet precious metals sales are always priced in dollars. Hence the dollar value can be either a plus or a minus to a mining company’s bottom line. As indicated in the article about South African mining, South Africa has always been a strength in the world’s mine production. But now they are extremely concerned about layoffs and marginal profitability is causing those mines to close. In addition, South Africa still has significant issues with providing energy. They often do not have the infrastructure to keep their mines running at full capacity. So a lack of preparation is now causing closures in spite of a shortage in the market.

The financial crisis is being felt around the world. Hopefully, you are prepared with some balance in your portfolio to help you better weather this storm. We appreciate your business and your trust. We look forward to continuing to serve you.

MARKET FOCUS, EMERGING TRENDS

James Steel, Analyst, HSBC Global Research

 

Gold prices traded higher, boosted by disappointing US economic releases and a weaker USD. March consumer confidence came in at 26, according to the Conference Board, or two points below the consensus expectation of 28. HSBC economist, Ryan Wang, said the labor market remains a significant drag on consumer sentiment. The Jobs Plentiful Index was unchanged at a low 4.6, and the Jobs Hard to Get Index climbed to 48.7 from 46.9, indicating that nearly half of respondents consider it difficult to find a job. US home prices in January fell 19% year-on-year, according to the S&P/Case-Shiller index. Sliding home prices and weak consumer confidence helped undermine the USD and encouraged safe-haven buying in gold.

Gold largely ignored the latest strength in the US equity markets. According to Reuters, US stocks closed out March with their best monthly performance since 2002.

The ability of gold to hold on to some of its early gains in the face of an equity market rally may indicate underlying gold market strengths. Traditionally, inflation fears are supportive of gold prices. On the theme of inflation, Philadelphia Fed President Charles Plosser, in a speech at the Booth School of Business at the University of Chicago, said the Fed needs to be ready to scale back monetary stimulus as the US economic recovery gains momentum. This is necessary, he said, to prevent a longer-run jump in inflation. When the financial markets begin to operate normally and the economy improves, Mr. Plosser said, the Fed’s balance sheet must contract. Gold prices are finding support largely from the fear that quantitative easing and other Fed policies will result in a long-run increase in inflation.

The Organization for Economic Cooperation and Development issued a report forecasting rising deflation. The OECD forecast that the global economy will contract 4.3% this year, a sharp revision from its forecast last November of a 0.4% decline. In its interim outlook, the OECD said the world is in the midst of a synchronized recession, accompanied by a collapse in world trade. The report said the economic downturn will likely continue into 2010. The slowdown means that the euro zone may experience falling inflation, while Japan and the US run the risk of outright deflation, according to the OECD.

Gold is caught between bearish implications of near-term deflationary pressures on the one hand and bullish concerns that Fed policies may unleash a significant increase in inflationary pressures in the longer term. Going forward, gold prices will be largely determined by investor’s confidence in the Fed’s ability to conduct sufficient quantitative easing to revive the economy without triggering inflation. This will depend on the Fed’s applying the monetary brakes at the right time, Fed Chairman Ben Bernanke said earlier this month in testimony before the Senate Banking Committee.

In March, India did not import any gold for the second month in a row, according to the Bombay Bullion Association; they imported just 1.9t in January. Gold imports in February and March last year totaled 23t and 21t, respectively, according to customs data, down sharply from an average of about 50t per month since 2000. Suresh Hundia, the association president, told Reuters that high prices had reduced domestic demand and stimulated scrap recycling. India’s gold demand has been declining for many months; imports slumped 48% in 2008 to 396t, according to official customs data. The drop in gold demand in India and other emerging markets has been offset by increased gold EFT demand.

 

SILVER

Both silver and gold have enjoyed strong runs recently, but silver has outperformed, with the price rising 30% in 2009 (up to February 18th) compared with gold’s 11%. This has reduced the gold/silver ratio from 80 to 69, a fall of 13%.

Why has silver done so well?

Check the month-on-month change in the gold price and the month-on-month change in the gold silver ratio since January, 2008. When gold is rising the gold/silver ratio declines, i.e. silver rises by more. When gold falls the gold/silver ratio widens, i.e. silver declines by more. The simplest explanation for this is that the silver market is a lot smaller, and so inflows or outflows of investment money have more of an impact, (although of course those flows are smaller too).

ETF flows, however, have been relatively slow for silver in February, at least compared with gold. At the end of 2008 the three ETFs had 8,254t of silver, compared to the 15 gold ETFs, which had 1,195t of gold, a ratio of 6.9:1. January saw inflows of 860t of silver and 105t of gold, a ratio of just over 8:1.

But, up to February 13^th we have seen inflows of about 420t to 200t, a ratio of just over 2:1. A similar story can be seen on Comex where the non-commercial net long for silver rose by a factor of nearly 10:1 in January compared with gold, but less than 4:1 in February.

By way of comparison, silver mine production is roughly eight times greater than gold mine production. So perhaps another reason for silver’s performance is that it has a bigger function as an industrial metal than does gold, which is regarded much more purely as a safe haven.

Silver’s relatively strong rise compared to gold compares well with that of the two other precious metals—copper is up 18% and the two PGMs, platinum and palladium, have gained 21% and 18% respectively.

We are not convinced gold can maintain its rally, at least in the short-term, and similarly silver might have overextended itself. Unlike gold, however, silver is not just a bellwether for the level of the panic in the global financial system, as its industrial use is affected by different factors. Its fortunes will therefore depend partly on how industrial metals do.

The twist to all of this is that we are not convinced that the recent rally in other metals with a big industrial component is solidly based, either.

GOLD

From Platts (London)

Total South African gold production fell by 13.6% to 220,127 kg in 2008, the lowest level of production since the 218,031 kg produced in 1922, the country’s Chamber of Mines (CoM) near the end of February.

The 13.6% decline was also the largest single drop in gold production since the strike-induced 13.8% decline in 1922, the Chamber of Mines noted.

“Key reasons for the year-on-year decline in gold production include the impact of the electricity supply curtailment in early 2008, which forced downsizing in the gold mining industry and the significant impact of safety-related closures,” the CoM said in a statement. “The mining of lower average grades facilitated by higher prices also contributed to the decline in production.”

The closure of the gold mining sector from January 24-31, 2008, was the first time that the South African gold mining sector had been closed since the Anglo-Boer war between 1900 and 1902, the CoM noted.

While South Africa had slipped to world production position number two behind China in 2007, the country’s rank declined a further position to third in 2008, trailing both China and the US, it added.

In the fourth quarter of 2008, South Africa’s total gold production decreased by 0.9% to 55,242 kg. When compared with the third quarter of 2008 on a year-on year basis, gold production was down by 10.7% in the fourth quarter.

For gold mines, production decreased by 16.8% to 182,490 kg in 2008. The 4.2% decline in tons milled to 51 million mt combined with the 13.1% decline in the average grade contributed to the overall decline, the CoM said.

But despite the decline in production, South Africa’s gold mining sector “remains a crucial part of the economy,” the CoM stressed. In 2008 the industry employed 166,000 people (average first three quarters), paid about Rand 15.5 billion ($1.55 billion US) in salaries and wages, spent about Rand 14 billion on procuring goods and services in the local economy, accounted for about 2.5% of GDP (directly, indirectly and induced), spent about Rand 9 billion on capex, paid about Rand 4 billion in taxes, and earned about 7% of the country’s merchandise exports (or about Rand 48 billion), the CoM said.

Buoyed by the huge success of gold coin sales through post office, India Post, the postal services department of the government of India, is adding more post offices to step up the trade in the yellow metal. Officials said India Post will soon launch the gold coins trade in 20 post offices in the southern state of Kerala that boasts of having the largest number of gold jewelry shops in the world. Kerala accounts for nearly 20% consumption of gold in India Total consumption of gold in India is around 700 tonnes per year. India Post has added the Kerala circle to enter the gold retail trade as part of a business diversification initiate. Customers can now walk into any of these post offices and buy pure 24 carat gold coins certified by the Swiss precious metal company Valcombi.

Indian Post launched the gold coins sale initiative three months back in association with Reliance Money and World Gold Council. The postal department is selling 0.5 gm, 1 gm, 5 gm, and 8 gm gold coins packed in tamper-proof covers.

Gold coins are the hottest commodity in India these days. Even as the price of gold continues to rise, sale of gold coins are taking place at a brisk pace through banks, equity and commodity brokering companies, finance firms and post offices across India.

PLATINUM

In 2008 platinum demand for jewelry use in China was estimated at around 0.76 million ounces, accounting for 68% of the global total of 1.12 million ounces, according to the Platinum 2008 Interim Review released by Johnson Matthey, the world’s leading authority on the platinum industry. It was the ninth year China had the world’s largest market for platinum jewelry.

China’s platinum jewelry market experienced unprecedented challenges in 2008, mainly due to widely fluctuating prices. In the first half of the year, high prices drive manufacturers to adopt a very cautious attitude toward procurement and led them to optimize their inventory management systems. Manufacturers made more efforts to recycle platinum to reduce risks, while high platinum prices also depressed platinum jewelry sales. However, with platinum prices falling in the second half of 2008 and along with proactive domestic fiscal policies, the platinum market is expected to see new opportunities in 2009 said Platinum Guild International (PGI) a global organization dedicated to promoting platinum jewelry.

PGI said that this situation was due to a combination of several factors: a drop in platinum prices as a result of falling industrial demand; China’s proactive domestic fiscal policies stimulating domestic spending, Chinese consumers’ passion for platinum, and the consistent promotion of platinum over the past decade.

Since the onset of the global financial crisis in the third quarter last year, industrial demand for platinum has fallen, along with the global price of platinum. The falling platinum price then triggered a desire to purchase among domestic manufacturers. According to statistics from the Shanghai Gold Exchange, platinum purchases increased 16% year-on-year in 2008. The fall in global platinum prices led in turn to a fall in the retail price of platinum jewelry, leading to stronger platinum jewelry sales.

According to a survey conducted by PGI, 17 key retailers in northern China reported that sales of platinum jewelry increased significantly over Christmas and the New Year. In southern China, platinum sales increased by 20-30% over Christmas and by 15-50% over the New Year season with Shanghai reporting the greatest rise. Moreover, in the second half of 2008, China adopted a proactive fiscal policy and more moderate monetary policies, aimed at expanding domestic demand and stimulating economic growth.

According to the latest statistics released by PGI, retail sales for the first three days of 2009 rose 13% year-on-year, showing that the government’s efforts to spur domestic demand and prevent an economic slowdown are yielding results. In addition, Oracle Added Value, a leading marketing research and consulting firm in China, said in its survey, “The Wedding Jewelry Market in 2008”, that platinum jewelry retains its dominance in the wedding market with 75% of brides and 68% of grooms interviewed saying they had chosen platinum wedding rings.

“As the current price is less than half of the peak in 2008, we expect rapid growth in Chinese platinum demand,” said Johnson Matthey.

“As the world’s largest market for platinum jewelry, China has experienced steady and rapid development in terms of both market scale and industry growth over the past decade. Faced with a turbulent market situation in 2008, China’s platinum jewelry industry adopted timely and effective measures, showing the overall strength of China’s jewelry industry,” said Grace Man, directory of PGI in China. “In 2009, with a more stable market price, a booming wedding market and the orchestrated efforts of the industry, we are confident of the future development of the platinum jewelry industry in China.”