Rust Rare Coin, Inc. November, 2008

PRICE TRENDS (New York closes)

IN OUR OPINION. . . .

 

Although the election is finally over and a new president will be going into office, questions concerning the economy and what new practices are going to be implemented are still looming. The nation’s choice of a president didn’t settle anything in the markets. The same problems still exist today that did on November 4th.

This newsletter is a bit technical; analysts are trying to interpret the challenges of the market including those that miners and base metal fabricators are going to have with the changes that will be coming due to the effect of the credit crunch.

Because of the credit crisis and the general unease of the public, there has been a very high interest in metals during October. Even the media has followed the commodity and precious metals markets closer. With the increased demand for metals we have seen significant shortages in gold, silver, and platinum. The mint even ran out of planchets to produce coins. This is part of the reason that the premiums have been so high. There is no quick fix to this situation. Product supply is still tight for physicals and premiums remain high. We do feel that as the markets rebound like we have seen in the last few days that the premiums should start to ease and availability should become easier. However, until that rebound is sustained, expect the premiums to be high and delivery to be slow.

Due to the fact that we have seen significant sell-offs in the commodity markets to offset margin calls in other areas, we believe the metals market is truly oversold.

Over the last few years there has been a large difference in the price between platinum and gold. When the platinum price is close to gold, holding platinum becomes a good investment. Platinum is now trading within $100 of gold; this is a good time to buy platinum.

The metals market has come down, but those who have positioned themselves in physicals instead of paper have not seen nearly as drastic a fall as the paper market indicates. As we all know there will be challenges ahead. We feel that precious metals should definitely have a place in your investment portfolio, especially over the next two years.

 

MARKET FOCUS, EMERGING TRENDS

James Steel, Analyst, HSBC Global Research

Bullion prices continued to tumble, as many commodity investors favored cash. Global equity market losses, particularly in the financial sector, prompted continued liquidation of precious metals holdings in the search for cash. Gold and the other precious metals were further weighed down by the continuing US dollar rally. US dollar gains at the end of October were remarkable. Robert Lynch, HSBC currency analyst, said a partial correction in the USD is possible, and this, by extension, would be likely to spur a rally by gold. Much will depend on the equity markets, according to Mr. Lynch. Another plunge in equities may send investors into the USD, and we believe this would keep the pressure on gold. Given equity market’s recent declines, the broader deleveraging process globally has yet to run its course. Until it does, it will be difficult for gold to rally.

Gold prices have fallen to marginal costs of production. Traditional microeconomic theory suggests that a commodity will not trade below the costs of production for a sustained period without either a reduction in output or a recovery in prices. We believe that gold prices will eventually recover and move higher, but that in the near term, gold may continue to fall. That said, a sustained move by gold below USD 700/oz is unlikely.

A rally in oil prices of nearly $3 per barrel on the eve of a special OPEC meeting at the end of October did not appear to lend much support to gold prices. Most OPEC ministers voiced support for a production cut but had widely divergent views about the size of any reduction. Should OPEC members agree to a substantial output cut and were oil prices to rally further, gold could benefit.

Continuing credit uncertainty and equity market declines abroad weighed on the precious metals market. A plunge in Tokyo’s Nikkei 225 stock average to a 26-year low triggered widespread liquidation of commodities, including gold. A stronger dollar and yen—an indication of risk-averse trading—also weighed on bullion prices. Gold moved back onto the plus column on indications that tightness in the credit markets was beginning to ease. This encouraged light purchases of bullion, we believe.

Indications of a more relaxed credit market included a moderation in the London interbank offered rate and US banks’ taking advantage of the bailout package, approved by Congress earlier this month, to sell ownership stakes in return for access to funding. An unexpected 2.7% rise in US new-home sales for September, compared with August 2008, helped spur a midday rally in the US stock markets and this helped bolster gold. An easing in credit conditions from the US Federal Reserve may also lend further support to gold.

Precious metals still face an uncertain outlook due to the credit crisis and the threat of global recession. The financial markets remain subject to heavy risk-averse trading which is triggering structural deleveraging across the world. Worries about global recession and the repricing of risk have hit commodities, including the precious metals, hard in recent months. A Bloomberg article on 27 October reported that investment tracking the DJ-AIG commodity index dropped by $20 billion or 36% in Q3. The article stated that according to managers of the index, $35 billion was tracking the commodity index at the end of Q3, compared to $55 billion at the end of Q2. The outflow of funds is effectively starving the commodity sector, and bullion prices are moving lower as a result. Until buyers are prepared to come forward to buy not just commodities but other types of risky assets, bullion could come under further downward price pressure. Given heavy redemptions reported by hedge funds for September and declines in commodity indices, it may be too early to call a halt to the gold price decline.

 

SILVER

Silver Production Falls by 70%--

by David Morgan, KITCO

This headline should grab anyone’s attention, especially those interested in the silver market. Before going forward, let me explain that fully 70% of silver is produced as a result of mining other metals, mostly base metals. For example, of the silver mined in 2007, copper mining is responsible for 28%, lead/zinc mining yielded 32%, and gold mining brought about 10% of the silver to the market. (data from GFMS World Silver Survey 2008,p. 31.)

The point is, with the current low prices for all the base metals, many companies that produce them are slowing, closing, or stopping projects. The result is obvious: the overall production of silver from base metal and even gold mining is going to be reduced. Will this bring down silver production by the 70% mentioned? Of course not, but slowing base metal mining activity slows the amount of silver produced.

As far as primary silver producers are concerned, some will be unprofitable at these levels, and all will be looking to find as much high-grade ore as possible, to stay as close to profitable as can be expected. Some marginal projects will be shelved and some projects may be forced to close if prices remain in the doldrums.

The overall mining equities have been completely devastated, as all of us in this sector know, and the prices of these stocks have dropped to levels that few can believe. The earnings of these companies will of course be falling as well.

As of the week ending October 24, 2008, the year to date results for mining stocks are as follows: Copper down 44%, Zinc down 54%, Lead down 55%, Silver down 37%, Gold down 12%, XAU down 59%, HUI down 59%.

Across the board, both the metals and mining shares have been blasted. The base metals fare worse than both silver and gold, and the basket of precious metals stocks (as per the XAU and HUI) are doing worse than any metal cited. Again, we find silver at this point in time being not as precious as gold, but more precious than its base metal cousins.

There is some encouragement, as the past few days in the metals markets have shown some strength as interest rates were cut on the US dollar. The gold/silver ratio has backed off from being over 85 recently to 77. Perhaps the worst is over, perhaps not.

For those who are historically inclined the GFMS World Silver Survey 2008, page 58, discusses the main uses of silver. Under the classification of coins we find, “Historically, silver was more widely used in coinage than gold, being in greater supply and of less value, thus being practical for everyday payments. Most nations were on a silver standard until the late 19^th century with silver coin forming the main circulating currency. But after the gold rushes, the silver standard increasingly gave way to gold. Silver was gradually phased out of regular coinage. . .”

Silver coinage stopped in 1965, the US closed the gold window in 1971 and here we are today looking at a financial system that has certainly lost its way.

PLATINUM

Renewed worry about auto demand in 2009 helped send the PGMs into a near tailspin. General Motors and Chrysler took steps on Thursday to cut jobs and close plants, and several auto makers in Europe and Asian forecast a deeper global downturn in sales. Reuters reported that Toyota Motor’s global auto sales are expected to remain weak in 2009, which would mark the first annual drop in ten years. In China, auto sales in September totaled 751,500 a decline of 2.74% from a year earlier, according to the China Association of Automobile Manufacturers; this represented a sharp decline from the 20% year-on-year growth rate recorded in January.

The gloomy 2009 outlook for auto demand more than offset the bullish impact of an Anglo Platinum report of a reduction in refined platinum production. The company, the world’s largest platinum producer reported a Q3 decline of 11% in refined output to 543,200 ounces due to plant maintenance. Anglo Platinum is maintaining its 2008 production target of 2.4 moz, which would mark a slight decrease from 2.47 moz produced in 2007. South African producers representing the bulk of platinum output recently stated that they have no plans to alter their output forecasts for 2009, due to price, and several producers maintained an optimistic price outlook. Platinum is trading at a premium to gold of less than USD100/oz, a level that appears inordinately narrow and inconsistent with fundamentals, even given the decline in auto demand for platinum.

Platinum prices continue to slide. The premium over gold now is USD125/oz, compared to more than USD1200/oz in March this year. This is the narrowest it has been since the Asian economic and currency crisis in the late 1990s, when platinum fell to a USD5/oz premium to gold in January 1997. At that time, jewelry accounted for more than 50% of platinum consumption, with the bulk of purchases taking place in Asia. The drop in platinum prices at that time was directly related to a reduction in consumer demand for jewelry in China and Japan, as a direct result of the Asian crisis. Currently, concerns about auto catalyst demand have undermined platinum prices. We do not believe that the intrinsic value of platinum, which has limited stockpiles and is largely dependent on South African production, is close to that of gold. Although platinum prices may continue to weaken in the short term, we expect the premium over gold to widen in the medium to longer term.

Platinum recouped some losses after a CNBC news report quoted a White House spokesman as saying that the finance arms of US auto makers such as General Motors and Chrysler could apply for aid from the financial rescue package approved by Congress earlier this month.