Michael Fuljenz's Metals Market Report
March 7, 2011

Open Warfare In Libya, Chronic Dollar And Euro Weakness & Global Unrest Fuel Gold's Rise To New All-Time High While Silver Reaches Another 31-Year High

Gold set another new all-time high this morning at $1445, with silver reaching another 31-year high at $36.70. The dollar is falling again, which explains part of gold's surge, but most of the buying comes as a reaction to the escalation of tensions in Libya and other oil-rich lands. Open warfare is currently raging between Moammar Gadhaffi and his opponents near a major oil field in Libya. This drove crude oil to $106, its highest level since mid-2008. Also, chronic weakness of both the dollar and euro - the world's two leading paper currencies - helps the metals. Today, Moody's downgraded Greece's sovereign debt by three notches, while the U.S. is suffering Greek-style public worker protests in several mid-western states.

Gold 52 weeks ago (March 8, 2010): $1125.75

Gold's average price during 2011: $1370.16

Gold's Low for 2011: $1316 on January 28

Gold's High for 2011: $1445 on March 7

The Bottom Line: Gold, silver and crude oil keep soaring over the tensions in Libya and renewed dollar weakness.

Commodities Soar as the U.S. Dollar Declines Once Again

Last week, crude oil futures closed above $100 a barrel for the first time since 2008 and gold hit another all-time high at $1437 on March 2 (and $1445 today). The surface cause was a hot war in Libya between madman-leader Moammar Gadhafi and the rebel forces holding the oil-rich eastern part of the nation, particularly the oil-refinery center of Brega. Already, more than half (about one million barrels a day) of Libya's oil production is off-line. As a result, Brent crude oil reached $116 a barrel, its highest closing price since August 21, 2008, and West Texas Crude is over $100, despite huge inventories in storage.

Turning to gold and silver, the CRB Metals Index is near a record high (which was set in mid-February, 2011), buoyed by record highs in gold, copper and tin, plus a series of 31-year highs in silver recently. In February, silver led the entire commodity spectrum with 20.2% gains in a single month. Then, in the first week of March, silver added another 9.6% for a 31.7% gain in the last five weeks. Through the end of February, the best performing commodity of 2011 so far was Tin, up 19.3%, but Silver is now #1. The energy sector is led by Heating Oil (+15%), while the food sector is led by Corn (+15% through Feb. 28).

Most commodities rise due to simple supply and demand equations. If more corn is siphoned into ethanol for gas tanks, then the price of corn goes up. If oil fields are disrupted, the price of oil goes up. Gold has a slightly different set of fundamentals. New supply is always limited and industrial demand is static, so gold's fate depends on monetary policies and global unrest more than industrial supply and demand, so gold may be primed to make a big new move as a crisis hedge. While other commodities are based on naked supply and demand for industrial purposes, gold is driven by investment demand. In past crises, investors turned to the U.S. dollar for safety, but not this time. Dan Cook, CEO of IG Markets put it this way: "Rather than running to anything else, particularly the dollar, people seem to be flocking to gold."

Global Inflation Update: Food is the #1 Concern

Mexico suffered a hard freeze last month. Since Mexico has surpassed America's sun belt states in fruit and vegetable production - Mexico provides about half of America's fruits and vegetables - these vital grocery-store products will either be in short supply or extremely expensive, or both, this spring. The next crop is planted in April, and it will not be in stores until June, so be prepared for higher produce prices.

Pricy fruit is a minor inconvenience in America, but in poor lands the cost of a basic diet is already out of reach for the majority of Africa and central Asia. Last week, the United Nation's Food and Agriculture Organization (FAO) announced that its food price index rose 2.2% in February, the eighth monthly rise in a row and an all-time high. The UN also reported that global cereal supplies may tighten sharply this year.

In order to fight near-runaway inflation in emerging nations, the giant young economies of the world are raising interest rates right and left: Brazil's central bank raised its key interest rate by 0.5% to 11.75% last week, and India's central bank raised rates 0.25% (for the seventh time) in order to combat inflation. Here in the U.S., meanwhile, our U.S. Federal Reserve continues to ignore inflation. Last Tuesday, Chairman Ben Bernanke told the Senate Banking Committee "inflation is stable." Not everyone agrees, of course. In an editorial entitled, "Why the Dollar's Reign is Near an End," the Wall Street Journal predicted that the Fed's current policies will lead to more inflation and the dollar's death as a global reserve currency.

Flash Alert! Utah (and 12 other States) Seek to Bring Back Gold as Legal Tender

Last Friday, Fox News reported that Utah took its first step toward bringing back the gold standard by passing a bill that would "recognize gold and silver coins issued by the federal government as legal currency." The Utah House voted 47-26 in favor of the legislation that would also exempt the sale of gold from state capital gains taxes. If the bill passes, coins could be used and accepted voluntarily as an alternative to paper. The legislation how heads to the state Senate, where a vote is expected this week.

According to Fox News, 12 other states have proposed similar measures. In alphabetical order, they are Colorado, Georgia, Montana, Missouri, Indiana, Iowa, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont and Washington.  The backers of Utah's bill say they want to send a message to the rest of America. "People sense that in the era of quantitative easing and zero interest rates, something has gone haywire with our monetary policy," said Jeffrey Bell, policy director for the Washington-based American Principles in Action, which helped shape the bill. "If one state recognizes gold as a valid currency, I think it would embolden people not just in other states but in Washington, DC." Stay tuned!

Mainstream Financial Planners are "Going for the Gold"

"Financial Planning" (the magazine for mainstream financial planners) featured a cover story, "Going for the Gold" by Donald Jay Korn, on how financial advisors should bring gold into mainstream portfolios. The bulk of the article talks about gold mining stocks and mutual funds but toward the end, the author mentions the physical metals' long-term advantage over gold stocks: For the five years, 2005-2010, the magazine reports, gold bullion ETFs gained 21.9% per year vs. just 19.2% in Morningstar's precious metals category of mutual funds. In the same five years, gold bullion coins or bars are up 22.2% per year.

Silver up 113% Since End of 2009

The U.S. Mint and other world mints are having to allocate silver bullion coins to dealers due to increased demand.

Why Gold and Rare Coin Prices Should Rise in 2011

Demand for gold was at a 10 year high in 2010 according to the World Gold Council. There was a 56% increase in tonnage demand for physical bars and a 17% increase in tonnage demand for gold jewelry. Increased demand for gold typically results in more customers from advertising for dealers. At some point enough of those new customers are introduced to rare coins by their dealers and the coin market has often taken off. Many of those bullion buyers then trade some of their bullion for rare coins, further fueling the market. The recession has resulted in premature selling by some coin buyers but that is slowing down, which in my opinion, bodes well for the rare coin market in 2011. Banks that reduced credit lines to dealers in 2008 - 2010 are now becoming a bit more receptive. The almost certain repeal of 1099 provisions in the new health care bill will further boost the market and discredit those dealers who used this as a scare tactic to get collectors and investors to prematurely sell or trade. Obviously the past doesn't guarantee future results.

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