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We’re back!
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(August 10, 2009) As promised, we have returned to the scene after our week in sundry far-flung locations, experiencing the various joys known as family vacations. It appears that the precious metals performed pretty well without us.
Silver, for instance, in the $14.60 neighborhood is now up more than two bucks over its early-July low, and gold has now gained about 5% from the $908 level it touched down at on July 13th. I guess a surging equities market is doing neither metal any harm. Or, more accurately, the news is that the economy is not doing any better exactly, but does seems to be deteriorating less rapidly. So stocks and commodities are going up.

Hmmm...

Is this what we’re reduced to calling good news: the handbasket that we're in is still moving towards its ultimate destination, but it is not currently picking up any speed? Pretty thin gruel, or possibly damning with faint praise, you might say, Anyway, it’s an improvement over the silly ‘green shoots’ analogy that we heard back in the spring, a figure of speech and evidence of collective hallucination that thankfully has since been taken out back and …disposed of.

Platinum, we notice, is now up some $160 since early July. The noble gray metal, the largest use for which is catalytic converters for autos and trucks, is no doubt stimulated itself by the idea that the “Cash for Clunkers” program will stir up demand as new cars are sold off the lots of once-abandoned auto dealerships.

Of course, each towed-in clunker taken in trade contains a like amount of platinum that will be recycled and returned to the market, thus canceling any net platinum demand. And “Cash for Clunkers” adds one other weighty piece to our abovementioned handcart: most auto purchases are financed, which means the program will actually leave the indebted US consumer in worse shape than before. But as long as the monthly payments are made on time, he or she will get to drive a shinier, newer car than the clunker previously owned.

Ain’t stimulus grand?

Palladium, the other grey metal, topped out last Wednesday at $277 per troy ounce, giving it a nice round gain of 50% since the start of this year. Outside of jewelry and catalytic converters, the uses of palladium are diverse and a bit mysterious to most of us. But it seems that every time you turn around, you read about some new technology on the drawing boards that depends on palladium’s unique properties.

Gold prices were boosted this past week, partially on news that European countries who are signatories to the Central Bank Gold Agreement agreed to lower their collective gold sales limit from 500 tonnes per year to 400 tonnes, for the term of the next five years. During this period, they also agreed to ‘accommodate’ any sales by the International Monetary Fund should it decide to dispose of some of its holdings.

Potential sales of gold by the IMF have, over the past few years, repeatedly been cited by gold bears as negatives for the gold markets, often on no evidence of that possibility whatever. This latest version of the CBGA essentially neutralizes that threat through 2014 by promising that central bank gold sales will be proportionally limited should the IMF decide to reduce its gold holdings.

Agreements are all well and good, but the fact is that most central banks abandoned their propensity to sell gold earlier this decade, and for the past two years sales have been well under the agreed-upon ceilings. Furthermore, world markets absorb some 2400 tonnes of newly mined gold each year. So under the new agreement, the 400 tonnes that central banks may cumulatively sell annually is not much more than the amount mined worldwide in seven weeks time.

Investment demand for physical gold has surged in the past twelve months, gobbling up both newly-mined metal and the record amounts coming from gold recycling. Consider some numbers: world mines produce some 600 tonnes of gold every quarter. In addition, in the first quarter of 2009, refining of scrap gold jewelry came to a record amount of over 500 tonnes of pure gold, bringing the total for the first three months of 2009 to some 1100 tonnes of gold brought to market.

Did this record influx of bullion swamp the gold market? Quite the opposite, as prices rose in first quarter 2009 from $874 to $916.

This trend continued in the second quarter of 2009: gold recovery from scrap yielded approximately 360 tonnes by industry estimates, yet worldwide demand absorbed that amount plus the 600 tonnes of mine production, with prices rising (albeit slightly) for the quarter.

The demand for physical gold bullion as an investment, an insurance policy, and an old fashioned store of value has surged over the past year or so, outstripping mining production, record scrap recycling, and substantial but shrinking sales by central banks.

In short, a lot of people and institutions are buying gold. Its price has been more stable over the past two years than any other marked-to-market item we can think of. And increasingly it is regaining its place as the currency that it always has been.


 

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