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AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.


4/30/2004: Gold dips on China comments -- Opportunity knocks!

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Greeting from American Gold Exchange. In this issue of Gold Market Commentary:

Gold dips on China comments
Opportunity knocks
Silver’s roller coaster– what happened?
Platinum falls, palladium droops
Classic U.S. coins remain steady

Gold dips on China comments

On Wednesday of this week the metals markets took a dive on comments by Chinese Premier Wen Jiabao suggesting that China will take steps to cool its superheated economy in the short term. In response, gold fell to a six-month intraday low of just above $380.50 before rallying back into the high $380s yesterday. Today it looks as though real support is kicking in, with gold hovering around $390. The other precious metals, too, have firmed in price after hitting lows in Asia and Europe yesterday. The worst appears to be over.

In its juggernaut toward a modern industrial economy, China has become a voracious consumer of all commodities, including base and precious metals — a trend that will continue far into the foreseeable future. China’s economy logged 9.7 percent growth in the first quarter of this year but faces resurgent inflation due to unchecked expansion in money supply, bank credit, and fixed asset investment.

Fearing economic volatility, Premier Wen told Reuters that “strong measures” would need to be taken to slow this rapid economic growth. (See Economy Watch, 4/29: “China’s Wen tough on economy.”) Although he has taken no specific actions, Wen's words alone caused commodities to fall across the board, including gold, silver, platinum, palladium, copper, aluminum, and other raw materials.

Opportunity knocks

The gold market, in our opinion, has over-reacted to Wen’s comments and is over-sold at its current levels. China’s hiccup is simply an excellent opportunity to buy into a market that is currently under-priced.

Gold’s rise from a 20-year low of $252 to its recent $430 high was due primarily to the falling of U.S. dollar from its artificially elevated perch of the late 1990s. Although the dollar has recently undergone a minor rally against the euro and yen, in large part because of signals from the Federal Reserve that it will soon raise interest rates, its larger trend is emphatically downward. The trend for gold, on the other hand, continues to be emphatically upward despite its recent dip. And as we say in the business, the trend is your friend!

More importantly, we’ve been seeing some indications recently that gold is dissociating itself somewhat from the dollar and responding to other fundamentals. Escalating oil and food prices, the first signs of significant inflation in our economy, are starting to create upward pressure on gold in its traditional role as hedge against inflation. Alan Greenspan warned this week of a long-term trend of substantially higher oil and gas prices (see Economy Watch, 4/27: “Higher prices in our future: Greenspan”), which will have a rippling effect on the cost of most goods and services. In addition, escalating violence in Iraq and the increasing risk of worldwide terrorism are amplifying gold’s safe haven attraction for investors in flights to quality and risk aversion. Throw in the demand for all commodities in China as it moves full steam toward capitalism and industry, and you have many strong reasons for an increasing gold price despite fluctuations in the dollar and possible near-term actions to curb China’s appetite.

Peter Grandich, editor of the noted investment publication The Grandich Letter, agrees: “Most of the fundamentals that drove metal prices are still intact. The U.S. dollar is completing its countertrend rally, debt continues to pile up in the consumer and government sector, and China is a runaway monster that no mere words can stop.… The knock you hear is opportunity,” he concludes, “answer the door.” (See Breaking Market Updates, 4/29: “Gold recovers from six-month low.”)

Twice in the past four months gold has rallied to $430 and stalled. Like the resistance we encountered at $295 and $330 during gold’s drive from $252 to beyond $400, the $430 mark has proven to be an important barrier to the metal’s march higher. But like those earlier barriers, $430 will be broken sooner or later. Nonetheless, barring some unforeseen circumstances like terrorist actions, gold is likely to channel in a fairly broad range — from $390 to $430 — for the time being, perhaps for as long as a few months. Trading now between $385 and $390, gold appears to be undervalued by $15 to $20 to us. Again, we urge you to take advantage of this lull in the market to buy the dips!

Silver’s roller coaster — What happened?

In the past seven months, silver skyrocketed from under $5.50 to over $8.30 and then crashed to under $6.00. After the Chinese comments on Wednesday, silver weakened further, falling as low as $5.62 in Europe yesterday morning before firming back up to $5.82 in New York. Today silver is trading at just over $6.00. That’s quite a wild ride! So what happened?

First, let’s review a little history. In 1980, the year we got into the precious metals business, silver reached its stratospheric all-time high of $50 an ounce. It soon returned to earth and, for the next four years, routinely traded a little above $7.00. Since 1984, however, any movement above $7.00 has been a short-lived anomaly. In 1987 and 1988 silver spiked silver above $7.00, and then again ten years later in 1998. But between 1984 and 2004, a 20-year period, the rule has been silver trading between $4.50 and $6.00 with occasional forays above and below this range. That’s why we issued a strong buy recommendation last September, when silver was finally moving above $5.00 in earnest and we foresaw an upside price of $7.00. (See Gold Market Commentary, 9/23/03: “Gold hits $373, eyes $417.”)

Between December of last year and March of 2004, silver rose steadily from $5.50 to $7.00. Fueling this rise was solid physical buying by the public. When silver pushed over $7.00, however, the market was quickly overtaken by speculative traders in futures contracts. Physical buying slowed considerably above $7.00 and most of the subsequent pressure driving silver over $8.00 came from these speculators in the futures market. By mid-March, without much physical buying to support it in earnest, the silver market became a paper chase. When this happens, momentum is the key to any future price movement. Once momentum stalls, downward pressure builds very quickly as speculators bail out, and prices can change radically.

In our update of April 1, with silver trading at $8.00, we advised you that the market looked unsustainable and was likely to fall hard, so be careful. (See Gold Market Commentary, 4/1/04: “Gold taps 15-year high, breakout possible!”) The next day silver hit a 17-year high of $8.29, then the breakdown started. Between April 1 and April 14, as the exodus of speculators began, silver fell back $1.30 to the $7.00 mark. It stabilized for a while before a second wave of speculator retreat pushed it down to $6.00. Then, just as silver was finding new footing just above $6.00, the Chinese comments hit the street and drove it down to $5.62.

Today silver seems to be stabilizing around the $6.00 mark once more and physical buying is again supporting the market. Based on its solid run up from about $5.25 last September to $6.75 in March (before the speculative buying pushed the market higher), we believe silver is fairly valued in the $6.25 to $6.75 range. Below $6.00 silver looks under-priced to us again. Buy the dips!

Platinum falls, Palladium droops

Platinum and palladium have both fallen as well. Platinum is now trading at $795, having dropped $141 since its $936 peak of April 19. Nonetheless, we still think it’s expensive. As you know from past updates, we’ve sidelined ourselves from the platinum market since it passed the $700 mark. Believing it was overpriced, we played it safe instead of sorry. Platinum has only been above $700 twice in the last 30 years, during the boom of 1980 and now, so caution is still recommended.

Palladium had been holding in the $275 range but has fallen further on the Chinese hiccup and is currently trading around $250. Its recent fall from the $322 high on April 8, in sympathy with weakness in gold, silver, and platinum, was caused primarily by recent dollar strength. Even with this dip, palladium is up nicely since we recommended it at $200 in January. We remain bullish on palladium and believe it has upside potential of $400 to $450 from here. Once again, buy the dips!

Classic U.S. coins remain strong

Despite the recent gyrations in the precious metals markets, the market for classic U.S. coins remains very steady. Supplies remain razor thin and demand for coins of any real rarity or quality is still exceptionally strong, so prices are holding. We are off to the next major coin show next week, the Central States Numismatic Societies annual show, this year in Milwaukee. It’s one of our favorite shows. Hopefully we’ll have success finding more high quality coins. We’ll have a report for you after we return to the office on May 10.

We recommend stocking up on quality U.S. gold coins now, before prices begin to rise again.

View our inventory of investment-quality U.S. gold coins.

We also have a small stash of 1878 Morgan Silver dollars, including the extremely popular Carson City issue. As the first year of issue of this extremely popular design, these coins are quite scarce but still inexpensive. Highly recommended!

View our inventory of U.S. silver coins.

That’s it for now. We’ll keep you informed.

As always, thanks for your time!

Sincerely,

Dana Samuelson, Owner and President
Dr. Bill Musgrave, Vice President

  

Metal Ask      Change
Gold $1,476.94           $0.00
Silver $17.01           $0.00
Platinum $934.12           $0.00
Palladium $1,946.20           $0.00
In US Dollars