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The World Saves Gold, So Does Gold Save the World?
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(May 24th, 2010) As 2010 began, gold buying in the United States had finally calmed down after two years of record demand, while fiscal mismanagement Greek-style caused gold to flow like wine into European vaults. Now here comes May, and we're off to the races again.
The year 2010 started slowly in the US gold business.

US gold bullion demand in 2010’s first quarter was a fraction of what we saw during the panic of 2008 and 2009. January through March of this year, our firm’s daily gold sales were about half of the volume of the previous two years. This complacency grew partly from the effect of slowly eroding prices. First quarter gold prices in dollar terms languished on both sides of $1,100.00 during that time, averaging around $1,095.00 during February.

From that point, gold prices rose, so slowly at first that potential investors could not foresee that prices would continue to move upward, and even reach a new all-time high in May.

US off-take of bullion bottomed out in April, during which the US Mint sold only 60,500 1-ounce US gold Eagles – exactly 121 Mint boxes –which was plenty to satisfy demand. But what a difference a month can make. In May so far, the US Mint has sold 142,500 gold Eagles (along with 61,000 1-ounce gold Buffaloes), and massive deliveries are scheduled for the week of May 24th-28th. Although these numbers show us only a part of US gold bullion demand, tracking the sale of gold Eagles gives a fairly accurate signal of the trend of US gold investor demand – and that direction is up strongly in the past few weeks.

While gold demand in the US began this year very quietly, real excitement was happening in the European gold markets. As recently as December 2009, the euro was strong, trading up to $1.51. But from there the slide in the value of the euro began. By February of this year, the euro was trading at record levels versus gold, and in early May almost reached the previously unheard-of €1,000/ounce price. By May 18th, the euro had lost 20% of its value against the US dollar - in less than six months time.

Gold bullion demand in Europe grew with higher prices, and the spreading news of just how serious are Greece’s fiscal woes. When the US-style near-trillion dollar(€750,000,000,000) bailout was announced, what followed can only be described as a currency panic. In Germany, particularly, citizens rightly perceive that they will be the chief financiers of the Greek bailout, and many began trading their euro for gold.

In the US this month, enormous orders for Krugerrands came from Germany, causing premiums to rise and coins disappear, as German investors looked to buy hard assets in a familiar form. Last week, as the euro touched the $1.21 level, we started to see similar European demand for gold in many forms – British sovereigns; vintage 20-franc coins from Switzerland, France, and Belgium; and Dutch 10-guilders. Vintage gold coins from Europe are being shipped home to where the demand is strongest.

The Austrian Mint cannot keep up with demand for the most popular bullion coin in Europe, the 1-ounce Philharmonic bullion coin. The Wall Street Journal reported on May 11th:

Meanwhile, at the Austrian Mint in Vienna, demand for gold coins and bars has soared. Since April 26, the mint has sold 243,500 ounces of gold, compared to 205,300 ounces in the entire first quarter, said Kerry Tattersall, marketing director for the Vienna-based organization."It's been exclusively European," Mr. Tattersall said. "I've seen no orders from America, no orders from Japan," he said, a change from the first quarter.The Mint sells Vienna Philharmonic gold coins weighing up to one ounce and gold bars weighing up to one kilo, mainly through banks in Austria and Germany and gold dealers around the world.

In the face of this huge demand, large orders are coming into the Royal Canadian Mint from dealers and banks looking for 1-ounce gold Maple Leafs coins of .9999 purity for the European markets.

The move out of the euro has been favorable for both gold and the US dollar, as both serve as alternatives to the beleaguered European currency. For the investor with substantial euro-based assets, the dollar and gold are both stable places to ride out the weakening of the euro. When the tide turns, and the euro (at least temporarily) starts to rebound, this equation will change. Gold, which traded over $1,240.00 on May 12th, and briefly down to $1,166.00 this past Friday, will likely recover some ground in dollar terms as the euro strengthens against the dollar. At least, temporarily.

For US bullion buyers, supply of bullion products is still good despite the recent, and somewhat explosive, increases in demand. Gold Buffaloes and Eagles continue to be available, with no substantial delays experienced yet.

The Mint has also announced that they are now striking the first of the 2010-dated fractional gold Eagles. We anticipate the release of new gold Eagles in the half-, quarter-, and tenth-ounce size in early June. We will post them up here as soon as we have confirmation of delivery.

European gold demand has had another effect on gold bullion coin choices, as we found out when we received this message from the Perth Mint’s Ron Curry on May 16th:

The popularity of Perth Mint bullion coins continues to rise, with the ‘sell out’ of the complete 30,000 mintage of the 2010 Year of the Tiger 1oz gold bullion coin. Interest in the annual Australian Lunar Series II has been very strong since the program was launched in 2008. Testament to this claim is reflected in the sell out of the 30,000 worldwide mintage of both the 2008 1oz Year of the Mouse and 2009 1oz Year of the Ox gold bullion coins. Since the dramatic surge in demand for gold bullion during the world financial crisis, The Perth Mint continues to review and improve its production capabilities and international distribution strategy to better satisfy demand.

With this announcement, the Perth Mint is now completely sold out of the first three issues (30,000 coins each) of 1-ounce gold coins of Lunar Series II. We currently have a few hundred of the 2008 Mouse and 2009 Ox in stock, and fewer than fifty of the Tigers.

We anticipate having the 2011 Year of the Rabbit coins this September. Of course, the whole series will come into focus when the Year of Dragon coins for 2012 arrive in autumn 2011.

And what will the gold market look like by then?

 

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