Gold Investments Market Update – Many Government Mints, Wholesalers and Refiners Internationally Continue to Ration Gold and Sil

Gold is marginally lower today despite sharply weaker oil prices (Light Sweet Crude Oil Future – Combined – FEB09 : -5.14%) and a slightly higher dollar (US DOLLAR INDEX: 83.01 +0.6%). There was significant volatility last week and such volatility often portends a big move up or down. Given the strong fundamentals, gold’s next move is likely to be up, especially as investment demand for gold coins, bars, certificates and exchange traded funds remains very robust. Concerns regarding the dollar’s long term health (and other major currencies) given the likelihood of trillion dollar deficits in the next few years are likely contributing to gold remaining well bid at these levels. Gold was capped above $890 last week and commodity index reweighting was probably a factor but safe haven demand for bullion remains strong and there are determined buyers at these levels (particularly for gold bars and bullion coins such as Kruggerands from high net worth investors as Merrill Lynch recounted to the Daily Telegraph). Many government mints, wholesalers and refiners internationally continue to ration gold and silver bullion. The Perth Mint of Western Australia, one of the world’s largest refiners (produces some 10% of the world’s bullion annually) and Australia’s biggest wholesaler of gold coins and bars has rationed its sales with the global financial crisis sparking a new gold rush according to the Daily Telegraph in Australia (see News section today). “Worried investors are seeking a safe home for their money and ploughing billions of dollars into the precious metal in a bid to preserve their wealth. Demand has now reached such unprecedented levels that the Perth Mint has been forced to ration its sales. Perth Mint’s bullion sales rose 194 per cent in the December quarter compared with the corresponding period in 2007, while silver bullion sales were up 140 per cent. The mint has suspended sales of all gold bars and all bullion coins – except its 1oz "Kangaroo" gold bullion coin. On Monday, after a three-month suspension, it will expand its range of bullion coins for sale but the restrictions remain in place for minted gold bullion bars so the mint can sell some gold to as many customers as possible. "We are working three shifts a day, six days a week, and still can’t keep up with demand," Perth Mint CEO Ed Harbuz said. "I’ve never known anything like this in the precious metals market.” The first serious economic data of the New Year has been very poor and has raised fears that we are on the verge of a serious global recession and maybe even a second Great Depression. Thus, this safe haven demand is not going to disappear any time soon. Especially as there are growing concerns that the scale of the international bailouts and stimulus packages are so humongous, that the debasement of major currencies internationally and competitive currency devaluations could ultimately lead to an international monetary crisis. The global property bubble, leveraged finance and high risk securitisation was the elephant in the room in the years prior to the current financial and economic crisis. Now the elephant in the room is the growing risk of an international monetary crisis centered on the global reserve currency, the dollar and possibly also sterling. The Economics Editor of the Daily Telegraph (UK) warns this morning (‘Reform plan raises fears of Bank secrecy’) that “the Bank of England will be able to print extra money without having legally to declare it under new plans which will heighten fears that the Government will secretly pump extra cash into the economy. . . . Although the amount of easing is likely to be limited, news of this increased secrecy will spark comparisons with Weimar Germany and Zimbabwe, where uncontrolled use of the central banks’ printing presses ultimately caused hyperinflation.” While deflationists like Nouriel Roubini and Robert Prechter haven been right in recent months, it is important that investors and especially savers focus on the threat that currency debasement and competitive currency devaluations pose and how they should position themselves in order to be prepared for this increasingly likely medium to long term scenario.

Mark O'Byrne

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