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The Increasingly Precious Metals
(March 27, 2004) Gold, silver, and palladium have been on a tear this month. After gold hit a 15-year high in January of $430, it sank to a low of $390 on March 3rd, and climbed to close at $422.10 on Friday the 26th. Our busiest shipping month ever reflects the fact that this rally is attracting a new wave of US bullion demand.
“There is great disorder under heaven. The situation is excellent.”

This aphorism of Chairman Mao’s can be applied to the current situation in the gold market, where prices are measured in US dollars – there is potential profit in chaos. A faltering, and seemingly jobless, economic recovery, growing deficits, the threat of $40 per barrel oil, further erosion of the dollar, and an uncertain national election coming up this November – all these factors point to ‘great disorder.’

The present rally in gold prices versus the US dollar is now nearly three years old. It began from the point when gold touched its 21st century low of US$258 in April of 2001. Since then, the dollar has lost ground against gold and most of the world’s major currencies.

This is, of course, a significant trend, and one that doesn’t bode well for the dollar and its buying power. But what gold bulls are hoping to see is a truly universal gold rally, in which gold asserts its primacy (it is, after all, the forgotten currency) against the whole range of the world’s fiat currencies.

David Chapman, in his commentary of 3/27/04, sees this beginning to happen:

“…Gold has…broken out against other currencies including the Euro and the Canadian Dollar. Gold in Yen is in a steady uptrend. This is a very positive sign as while Gold in US$ has been rising since the lows in 2001 the gains in other major currencies had been muted. We have long suspected that in a world of ongoing currency devaluation that gold would eventually begin to rise against all currencies and not just the US$. That process may be getting under way.”

For the sake of balance, let’s go to Leonard Kaplan’s commentary of March 24th. There, Leonard hedges his bets, and is not totally convinced that the important gold-versus-fiat rally is happening just yet:

“The strength of the gold market has been evident over the past few weeks, where it has been rallying against almost all currencies. But, and a most important but, this has occurred during a time when the USD has been generally rallying. So, in other words, gold has fallen LESS than the foreign currencies, not a totally convincing argument that we are on the verge of the second leg of the bull market in gold, one in which gold rises against all, or most, currencies. My view of gold is that we are still in a rather well defined trading range of perhaps $380 to $430, with the bottom support holding even if the USD rallies mightily.”

Warren Pollock, whose writing of 3/25 can be found on, extends Chapman’s point:

“In hindsight its easy to see that money rotates between widely held asset classes. As this rotation occurs investors seem to be accepting less and less return for more and more risk. It’s possible (probable) that all widely-held assets could deteriorate concurrently… Even though gold has a following it has very little mainstream support, it’s not widely held. I believe that diversification towards physical gold and liquidity may be the only way to withstand the next mass flight to safety.”

“(The) last flight to safety will be to physical gold simply because its the only asset that has no debt attached. The issue and concern is that a rush to gold could be sudden, and that the metal could not accommodate all the capital that would be in search of safety or preservation.”

What a “rush to gold” would entail, no one can say. But gold is an element of finite supply, a supply which is certainly dwarfed by the sheer mass of ambient dollars (and euros, yen, pounds, etc.) sloshing around in the world’s accounts. And one painful lesson was recently experienced by US investors during the run-up in tech and Internet stocks during 1997-2000.

That lesson is: when a virtually infinite supply of money chases a limited supply of the current investors’ darlings, you can throw prudent measures of valuation out the window.


But, enough about the yellow metal - how about those whites?

Platinum continues to hover on both sides of $900. Silver is close to a 15-year high, closing at $7.70 an ounce on Friday. And palladium, which we now sell on this site, has rallied some 50% this calendar year.

Although we don’t feature silver on this site, our store here in Phoenix has been swamped with silver business, both buying and selling. Higher prices have bought longtime holdings of silver out of hiding, as well as many new believers who smell a bull market and want to get in on it.

The last time silver rose above $7 was back in 1997. At that time, the retail physical market was practically all sellers and no buyers.

The contrast with today’s price rally in silver couldn’t be more striking. We are seeing broad-based investor support, and have sold a few truckloads of silver to people who think this market has quite a ways to run.

Although I’m neutral on the silver market myself, I can report from the trenches that retail demand is vigorous and seems to be growing as prices increase.

-Richard Smith


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