May 28, 2022

Soaring Gold and Silver Prices Should Not Be a Surprise to Anyone

bars-of-goldThe precious metal markets caught on fire in a big way today.  Gold prices surged the most in nine months by over $40 per ounce and silver closed in on $21 per ounce.  After losing 28% last year as short term hot money investors sold out their holdings, gold and silver were ready for a huge rally from both a fundamental and technical standpoint (see Why Gold and Silver Could Outperform Every Other Asset Class in 2014).

Precious Metals June 19, 2014

METALS PRICE CHANGE PER CENT GAIN
GOLD $1319.00 +40.50 3.17%
SILVER $20.89 +0.88 4.45%
PLATINUM $1472.00 +24.00 1.66%
PALLADIUM $841.00 +12.00 1.46%

The reasons for today’s huge gains in precious metals varied in the mainstream press but soaring prices should have been no surprise to long term investors who understand why gold and silver should be a part of every portfolio.

Gold and silver constitute a fundamental defense for wealth preservation against the rapidly eroding value of paper currencies backed by broke governments which is Why All Governments Hate Gold.

The various governments of the world and their central banks produce and distribute a product – paper currencies. Those currencies are backed by confidence, faith, and credit, but not by gold, oil, or anything real. Those currencies are digitally printed to excess, since almost all governments spend more than their revenues. The UK, Japan, and the USA are prime examples.

Politicians want to spend more money, but they also need to maintain the illusion that the money is still valuable, that it will retain most of its purchasing power over time, and that inflation is under control. The illusion weakens when food, gasoline prices, and other consumer goods are wildly rising in price. At a more abstract level, gold indicates the same lack of confidence in the printed pieces of paper that our central banks distribute.

If last year’s price correction shattered your conviction in owning gold and silver please consider The Fundamental Reasons for Owning Gold and Silver Are Stronger Than Ever.

One of the best methods for protecting wealth against a constantly depreciating paper currency is to own precious metals.

The bull case for precious metals remains intact as central bankers worldwide have become the lenders of last resort for nations that have exhausted their borrowing capacities.  Very little has changed since 2008 when the world financial system stood at the abyss of collapse.  Unsustainable debt levels continue to increase even as the capacity to service the debt diminishes.

Virtually every government in the world has taken on debts and liabilities that are clearly unsustainable.  Governments “don’t go broke” is the sustaining mantra for those with faith in paper currencies but governments do and will continue to print money that accelerates the loss of purchasing power of fiat currencies.  Please consider the following charts courtesy of John Mauldin Economics.

Eventually, as people realize that the central bank emperors have no clothes it will become clear Why There is No Upside Limit for Gold and Silver Prices.

The increase in the value of gold and silver is due to the fiscal and monetary policies of nations struggling to deal with massive levels of debt – policies that virtually guarantee a continued rise in the price of gold and silver.  Central banks, having exhausted all conventional means of monetary easing, have moved on to the last resort option of quantitative easing and currency debasement.

Government officials argue that unprecedented deficit spending and quantitative easing are necessary to stimulate economic  growth, but this theory has not worked in the real world.  Despite trillions in stimulus spending,  job creation and economic growth have been extremely weak and are likely to remain so according to economists Kenneth Rogoff and Carmen Reinhart who wrote This Time Is Different: Eight Centuries of Financial Folly.  According to Rogoff and Reinhart, economic growth is subpar when public sector debt exceeds 90% of GPD which the U.S. and many other developed nations have already surpassed.  In addition, a recovery of the job and housing markets after a financial crisis take many years due to the burden of excessive levels of debt.  Ultimately, Rogoff and Reinhart predict that austerity measures will need to be imposed along with some type of debt restructuring.

Is the U.S. capable of reducing spending and  instituting austerity measures? Cutting deficits means cutting payments to a long list of incomeless recipients who really don’t care where the entitlement money comes from.  Those still actually paying taxes will object strongly to any proposed tax increase to fund government spending.  Unable to cut spending or raise taxes leaves the Government with one bad option – print more money.

Politicians, who value getting elected above all else, are likely to strong arm the reliably compliant Federal Reserve to “come to the rescue” again with additional printed dollars.   In the minds of politicians and Federal Reserve officials, there will always be very compelling reasons to continue borrowing and money printing.

A nation that has reached the limits on taxation and borrowing has few viable policy options other than a continuing series of quantitative easing programs.  Current government policies, if left unchanged, virtually guarantee a continued increase in the price of precious metals.

 

Sales of Platinum American Eagle Coins Slow Down After Fast Start

2013 Platinum ProofUS Mint Resumes Production of American Eagle Platinum Bullion Coin

The United States Mint first began minting the American Eagle platinum bullion coin in 1997 but suspended production in late 2008 when demand for gold and silver bullion coins skyrocketed in the wake of the financial crisis.  With its production capacity strained by huge investor demand for gold and silver coins, the US Mint decided to suspend the production of platinum coins.

In 2007, the year before suspending production, annual sales of the platinum bullion coin totaled only 9,050 ounces.  During 2008, the platinum bullion coin was sold up until November and a total of 33,700 ounces of coins were sold.  The coin had been available in one ounce, one-half ounce, one-quarter ounce, and one-tenth ounce sizes with legal tender values of $100, $50, $25, and $10, respectively.

In addition to the bullion version of the American Eagle platinum coin a numismatic proof version of the coin was also available from 1997 to 2008 in all four sizes.  Despite suspending production of the bullion platinum coins in 2008 the Mint continued to annually produce one numismatic version of the platinum coin for collectors.  The numismatic proof version of the platinum coin undergoes a specialized minting process at the Mint where they are struck multiple times with special dies that result in the coin having a softly frosted finish with detailed images that seem to float above the mirror like surface of the coin.

AE Platinum Proof Reverse

AE Platinum Proof Reverse

The 2014 American Eagle Platinum bullion coins are produced by the West Point Mint and only come in a one ounce size.  In March, the first month that the coins were available, the Mint sold 10,000 coins as authorized purchasers built up inventories for sale to the public.  Just as with the American Eagle gold and silver bullion coins, the public cannot buy them directly from the Mint but must purchase them through US Mint authorized purchasers or coin dealers.  April sales of the platinum bullion coins totaled only 1,200 ounces.

Platinum is one of the rarest of precious metals with annual production through mining and recycling of only about 7 million ounces.  The vast majority of all platinum mined comes from South Africa and Russia both of which have unstable political situations which has resulted in frequently curtailed production.  Platinum consumption is expected to exceed supply during 2014 with the deficit coming out of platinum stocks.

Resumption of the production of platinum coins by the US Mint now allows investors the opportunity to diversify their precious metal holdings

Why The $1 Trillion Platinum Coin Idea Won’t Work

With the United States rapidly approaching the debt ceiling limit, a dysfunctional and divided Congress appears unable to agree on either spending cuts or an increase in the debt ceiling.  Absent some grand Congressional compromise, America’s nonstop trillion dollar deficit spending will rapidly push the nation to the brink of default before the end of next month.

Although the idea of default seems like a low probability to many people, if such an event were to occur, the result could be disastrous to both the markets and the economy.  Americans have always been able to come up with ingenious solutions before falling off the precipice and this time is no different.  The idea of minting a $1 trillion dollar face value platinum coin to cover our spending needs has quickly garnered national attention.

Predictably, opinions vary greatly as to the legality and efficacy of using a coin worth about $1,700 to fund a trillion dollars worth of spending.  The trillion dollar coin idea, ridiculed as irresponsible by some, is seen by others as a legitimate manner in which to resolve our deficit crisis.  For fiscal conservatives, the mere thought of proclaiming a common coin to have a trillion dollar value in order to remain solvent, is a wretched sign of how incredibly tenuous the financial condition of the United States has become.

In no particular order, here are some of the arguments regarding the trillion dollar coin.

U.S. Rep. Greg Walden (R-Ore.) announced that he would introduce a bill to stop the proposal to mint high-value platinum coins to pay the federal government’s bills.   Rep. Walden said, “Some people are in denial about the need to reduce spending and balance the budget. This scheme to mint trillion dollar platinum coins is absurd and dangerous, and would be laughable if the proponents weren’t so serious about it as a solution. I’m introducing a bill to stop it in its tracks.”

A Washington Research Group analyst said, “The President could assert that that 14th amendment negates the requirement for Congress to raise the debt ceiling.  Or Treasury could mint a $1 trillion platinum coin and deposit it at the Federal Reserve.  Neither are great options.  We see chaos if the market has to confront Treasuries where the debt is backed by Congress and those where it is not backed by Congress.  For banks, this might be as bad as an actual default. The economic uncertainty could cause lending to grind to a halt, the disruptions could cause unemployment to spike which means higher loan losses, and interest rates could skyrocket as the market is unsure whether one of these creative solutions is even legal.”

According to Bloomberg:

In general, the Treasury Department is not allowed to just print money if it feels like it. It must defer to the Federal Reserve’s control of the money supply. But there is an exception: Platinum coins may be struck with whatever specifications the Treasury secretary sees fit, including denomination.

This law was intended to allow the production of commemorative coins for collectors. But it can also be used to create large-denomination coins that Treasury can deposit with the Fed to finance payment of the government’s bills, in lieu of issuing debt.

What the law should say is that the executive branch may borrow to pay whatever obligations the federal government has, but may not print. Unfortunately, when we hit the debt ceiling, the situation will be backwards: The administration will not be allowed to borrow, but it can print in unlimited quantities.

Economist Paul Krugman, who believes that the United States effectively has no limit on its spending ability, thinks using a $1 trillion dollar coin would solve our debt limit crisis.

Should President Obama be willing to print a $1 trillion platinum coin if Republicans try to force America into default? Yes, absolutely. He will, after all, be faced with a choice between two alternatives: one that’s silly but benign, the other that’s equally silly but both vile and disastrous. The decision should be obvious.

Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.

The American Enterprise Institute explains how the platinum coin concept would work:

There are limits on how much paper money the U.S. can circulate and rules that govern coinage on gold, silver, and copper.  BUT, the Treasury has broad discretion on coins made from platinum.  The theory goes that the U.S. Mint would create a handful of trillion dollar (or more) platinum coins.  The President would then order the coins deposited at the Fed, who would then put the coin(s) in the Treasury who now can pay all their bills and a default is removed from the equation.  The effects on the currency market and inflation are unclear, to say the least.

According to CNN:

Normally, the Federal Reserve is charged with issuing currency. But U.S. law, specifically 31 USC § 5112, also grants Treasury permission to “mint and issue platinum bullion coins and proof platinum coins.”

This section of law was meant to allow for the printing of commemorative coins and the like. But the Treasury Secretary has the authority to mint these coins in any denomination he or she sees fit.

Why The $1 Trillion Platinum Coin Idea Won’t Work

The genesis of the trillion dollar platinum coin scheme derives from the law (Title 31, Section 5112, (31 U.S.C. § 5112(k)) passed by Congress under their constitutional power to coin money and regulate the value thereof.  This particular law was passed to give the U.S. Mint the authority to produce the American Eagle Platinum Bullion and Proof coins, without restriction to the American Eagle products program.

The Secretary may mint and issue platinum bullion coins and proof platinum coins in accordance with such specifications, designs, varieties, quantities, denominations, and inscriptions as the Secretary, in the Secretary’s discretion, may prescribe from time to time.

As argued in some of the commentary above, it seems clear that the law would allow the Secretary to authorize the U.S. Mint to produce a platinum of any stated denomination, including one trillion dollars.

The Federal Reserve would receive a coin on which would yield a profit of $1 trillion dollars based on the concept of seigniorage, which is the difference between the cost to produce the coin and the “face value” of the money stamped on it by the U.S. Mint.  However, under the rules of both the American Eagle program and other commemorative programs, the coin does not become “legal tender” until the U.S. Mint is paid for the coin with other legal tender or an appropriately valued amount of bullion.  Until the U.S. Mint was paid, the Federal Reserve would possess a rather beautiful coin worth only about $1,700, representing the intrinsic value of the platinum contained therein.

In the recent case of the government confiscation of 1933 Saint-Gauden Double Eagle gold coins from the heirs of Israel Swift, the court ruling confirmed the validity of the legal tender concept.  In the court ruling, Judge Davis cites precedents, including the government’s original case against Israel Swift in 1934, and confirmed that until a U.S. Mint coin is bought and paid for, the coin is not considered to be legal tender.  The concept of a coin not becoming legal tender until it was paid for was further confirmed in the sale of the Fenton-Farouk 1933 Double Eagle gold coin.  When the Double Eagle was sold on July 30, 2002, for $7.6 million, an additional $20 was required to be paid to “monetize” the face value of the coin in order for it to become legal currency.

Exactly how would the U.S. Mint be paid in order for the $1 trillion coin to become official legal tender?  If the Federal Reserve accepts the trillion dollar coin from the U.S. Mint, they would incur a $1 trillion liability to the U.S. Mint.  To offset the liability to the U.S. Mint, the U.S. Treasury would have sell $1 trillion in bonds which can’t legally be done due to the limits placed on its borrowing capacity by the debt ceiling limit.  The idea of a $1 trillion platinum coin becomes a fatally flawed solution that solves nothing.

So why can’t the Federal Reserve simply “print money” to pay for the $1 trillion coin?  As explained by Paul Krugman, the Fed does not legally have the power to print money, with one rather dubious exception.

First, as a legal matter the Federal government can’t just print money to pay its bills, with one peculiar exception. Instead, money has to be created by the Federal Reserve, which then puts it into circulation by buying Federal debt. You may say that this is an artificial distinction, because the Fed is effectively part of the government; but legally, the distinction matters, and the debt bought by the Fed counts against the debt ceiling.

Furthermore, Krugman admits that the platinum coin idea is a “gimmick” since the coin would effectively have the same value as other outstanding Treasury debt and the Treasury would have to eventually buy the coin back with additional borrowings.  Somewhat surprisingly, Krugman also concedes that despite the fact that much of the government’s current spending is financed by the Fed’s money printing, we cannot ignore the ultimate consequences of huge holdings of Treasury debt held by the Fed.

It’s true that printing money isn’t at all inflationary under current conditions — that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.

The entire concept of the United States funding itself with a manufactured $1 trillion dollar coin of nominal intrinsic value is fraught with danger since it highlights the extent to which we are willing to debase the value of the U.S. dollar to continue massive deficit spending – at some point our creditors will begin to take notice.  Think of Japan and China who each hold more than $1 trillion in U.S. Treasury debt securities.

Aside from the fact that the minting of a $1 trillion dollar coin is probably legal, it is not a workable solution since the coin would be of no value until it was paid for as explained above.  As discussed in Bloomberg, instead of pursuing dubious policies that will ultimately alarm the nation’s creditors, the challenge of compromising on the debt ceiling should be viewed as an opportunity for Congress to take responsibility for the nation’s future fiscal policies.

Watch what he did, not what he says. President Barack Obama says he won’t agree to spending cuts in return for Republicans’ raising the debt ceiling. Yet he did exactly that in 2011. And he should do it again.

The debt ceiling ought to be raised because nobody has a plan to eliminate the deficit immediately, and there is no popular support for doing what that would take. A congressman who isn’t presenting and supporting a zero-deficit-now plan has an obligation to give the federal government the additional borrowing authority that continued deficits make necessary.

For liberals, that’s the end of the matter. The debt ceiling should be raised without any spending cuts attached, and ideally it should be raised to infinity. One common argument goes like this: Since Congress sets spending and tax levels, no good purpose is served by holding a separate vote making it possible for the government to follow Congress’s original instructions.

That argument would have more force if the federal budget were the result of a deliberate policy. Instead, more and more of our spending rises on autopilot because of decisions made long ago, and nobody is forced to take responsibility for the gap between revenue and commitments. Bills to raise the debt ceiling are the only occasions when congressmen and the president come close to doing so. They are thus appropriate moments to attack the trends that are driving our rising debt.

More On This Topic – “Creating Money Out of Thin Air”

Former U.S. Mint Director: The $1 Trillion Platinum Coin Ain’t Worth a Plugged Nickel

The $1 trillion platinum coin is a desperate gimmick of questionable legality and doesn’t even come close to solving our fiscal problems.

First, it may be legal to mint a platinum bullion coin with a $1 trillion face value, but it’s not legal to pass it off as actually worth $1 trillion if there isn’t $1 trillion of platinum in it. That’s because it’s a bullion coin and not a legal circulating coin. The face value of a bullion coin has no relationship with the metal content because the value is in the metal, whose price fluctuates daily.

Second, for a coin to be worth its face value, it has to be made as a circulating coin.

The Fed would pay the Mint face value for the coin. After deducting the cost of the coin, the Mint would return the balance to the Treasury. All this needs to be done before we run out of money. Good luck with that.

Third, the current law does allow the Mint to make a platinum proof coin and does not specify whether this applies to a bullion coin or a circulating coin. A proof coin refers to a mirror-like finish and is made for coin collectors. However, a proof coin must be accepted at face value. Some have argued that the law can be stretched to allow for a platinum circulating coin, but this would not be consistent with the intent of the original legislation.

But let’s ignore the law for a moment. Let’s assume that a $1 trillion circulating coin could be created. It would be no different than creating money out of thin air.

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Global Gold Production Set For Major Decline As South African Mines Close

Global gold production could drop sharply as South African miners plan to dismiss thousands of workers for illegally striking.  South African precious metal miners have been beset by labor unrest for months as workers protest low wages and dangerous working conditions.  The latest disruption came Wednesday as South Africa’s largest gold miner announced plans to dismiss about 12,000 workers.

South Africa’s biggest gold miner by output, AngloGold Ashanti Ltd., said Wednesday it will begin a process to dismiss about 12,000 workers, following in the footsteps of other mining companies desperate to end crippling strikes.

If AngloGold follows through on its threat, it means more than 35,000 mining workers at several companies have been dismissed for illegally striking in recent weeks. The mass firings have prompted criticism from unions and the government, but so far have not provoked a repeat of the violence that sparked national labor unrest in South Africa in August.

Several major South African gold and platinum producers are struggling to end weeks of wildcat strikes that have halted thousands of ounces of gold and platinum production and caused billions of rand in lost revenue.

Gold production problems in South Africa run deeper than merely resolving a labor/management dispute over low wages.  The cost and effort to mine gold has grown exponentially as the easy to reach grades of gold ore have been depleted.  Miners have had to dig much deeper to reach low grades of ore with a corresponding increase in extraction costs.  South Africa, once the leading country in gold production has dropped to fifth place.

Courtesy wikipedia.com

In 2006, South Africa produced 272,128 kilograms of gold, but by 2011 output had plunged by 30% to only 190,000 kilograms.  With workers no longer willing to work for what amount to slave labor wages, along with declining ore reserves, gold output from South African mines will continue to decline dramatically.  SBG Securities analyst David Davis says “Almost all of the gold mines on strike are mature.  These mines were going to have to be restructured and downsized anyhow in the next 12 to 36 months.”

Further reductions in future global gold supply will continue based on the constantly increasing costs of mining lower grade ores and the lack of major new gold discoveries.  According to the US Geological Survey, gold production decreased in every year from 2001 to 2008, a remarkable statistic in light of the huge increase in gold prices during that period of time.  Gold sold for only around $300 per ounce in 2001 compared to today’s price of over $1,700 per ounce.

Over the past three years from 2009 to 2011, gold production increased as miners went all out to take advantage of surging gold prices.  According to the World Gold Council, mine production rose from 2,611 tonnes in 2009 to 2,822 tonnes in 2011.  The previous production peak for yearly gold production occurred in 2001 at 2,600 tonnes.  As the current situation in South Africa shows, much of the recent increase in gold production came as mining companies desperately worked old mines to depletion while paying workers as little as possible.   Those days are now over and South African gold production will continue to plummet.

Ironically, gold production soared from 1981 to 2000 as gold declined in price from $750 per ounce in 1981 to under $300 by the turn of the century.  Gold miners were forced to produce as much gold as possible to stay in business as revenues constantly declined due to the drop in the price of gold.

Absent major new discoveries of large gold deposits, gold mining production could decline substantially in future years.  Declining supplies, along with massive currency printing by central banks worldwide, will create the perfect storm for a continuation of the decade long bull market in gold.  Note to Ben Bernanke – no, you can’t print gold.

Platinum Has Soared 17% Since Early August – What Now?

Since establishing multiple chart bottoms at $1,400 during June and July, platinum has soared along with other precious metals.  Based on the London Fix Price, platinum has soared 16.5% from a low of $1,390 on August 3, 2012 to a September 20 closing price of $1,620.

In early August, Gold and Silver Blog examined the ostensibly poor fundamentals which had driven down the price of platinum and concluded that, based on the widely held bearish consensus and chart action, platinum had already fully discounted all bearish news.  In addition, the gold to platinum ratio had reached a low not seen since 1985, another signal that platinum was undervalued.  (See Platinum Perspectives – Time To Buy or Will The Bears Win?)

Courtesy: Kitco.com

Despite the recent normal consolidation in platinum, prices are likely to move substantially higher over time along with the rest of the precious metals complex.

As noted in early August, Platinum can be purchased from the U.S. Mint in the form of Proof Platinum Eagles.

The U.S. Mint has been producing the Proof American Platinum Eagle since 2009.  According to MintNewsBlog, the entire 2009 production of 8,000 Proof Platinum Eagles sold out in a week.  During 2010, the U.S. Mint produced 10,000 Proof Platinum coins which also quickly sold out.  During 2011, the mintage was set at 15,000 coins but the sales pace slowed considerably with pricing set at $2,092 and the coin has still not sold out with total sales of 14,760 as of the last U.S. Mint report.  On August 9th, the U.S. Mint announced that production of the 2012 Proof American  Platinum Eagles will be set at 15,000 coins.  Orders are limited to 5 per household with initial pricing at $1,692.

For investors disinclined to hold physical platinum, positions can be easily established through the purchase of the ETFS Physical Platinum Shares (PPLT) which holds physical platinum.  The PPLT holds a relatively small amount of platinum reflecting the lack of broad investor participation in the platinum sector.  The PPLT recently held about 5,000 ounces of platinum valued at $79.6 million.  Gold remains the premier investment choice in precious metals but a position in platinum could add some luster to an investor’s precious metals portfolio.

Courtesy – yahoo finance

More on this topic:
Closed Platinum Mines Offset By Stockpile Surplus – Is A Surprise Platinum Rally Coming?

Platinum Soars $78 On Week As Bodies Pile Up In South Africa

Platinum Soars $78 On Week As Bodies Pile Up In South Africa

South Africa continues to be wracked by violence as striking platinum mine workers clash with police.   In a confrontation between police and striking mine workers, a gunbattle resulted in the shooting deaths of 34 miners.

The center of the violence is at the Lonmin mine which suspended most production earlier this week when violence between rival labor unions resulted in the deaths of 10 miners.  The Lonmin mine is the world’s third largest producer of platinum.  South Africa is virtually the world’s sole source of platinum accounting for over 75% of total production.

As discussed in a previous post, the initial strike and violence at the Lonmim mine had virtually no impact on the price of platinum.  The majority of demand for platinum comes from the automobile and jewelry industries, both of which have seen weak demand due to a slowing world economy and outright recession in most of Europe.   In addition, a surplus stockpile of 4.5 million ounces of platinum, representing almost a year’s worth of demand has served to depress prices.

The time to buy often comes when there is no apparent reason to buy.   In “Platinum Perspectives – Time to Buy or Will The Bears Win?“, we argued that the steep $500 per ounce price decline since last year had already discounted reduced demand for platinum as well as the surplus stockpiles. Despite the apparently worsening fundamentals, platinum refused to drop decisively below $1,400 and rallied every time the price dipped below $1,400.

courtesy stockcharts.com

Even more intriguing was the fact that hedge funds had established the largest short positions is history in the futures market.  The crowd was definitely leaning in one direction.  Any news of further supply disruptions or an increase in demand for platinum would force bearish shorts to cover, resulting in sharply higher prices.  That is exactly what happened this week as fears spread that the increasing violence between police and striking platinum miners would result in further mine shutdowns.

Platinum soared by $78 on the week to close in New York trading at $1,479.

Will the unrest in South Africa spiral out of control?  As the world economy continues to get worse, social unrest has spread from one country to another resulting in toppled leaders, bloodshed and civil wars.  South Africa is a potential hotbed for social unrest and violence with a 25% unemployment rate, 50% of the population living below the poverty line and 50% of those under the age of 35 unemployed.

Prior to the violence at the Lonmin mine, miners had been on strike earlier this year for six weeks at Impala Platinum mine resulting in lost production of 120,000 ounces of platinum.  Unless the authorities and mine management can quickly contain the violence at the platinum mines, unrest could quickly spread to other mining operations and throughout South Africa.

South Africa is also a major gold producer ranking 5th in the world.  Although South African gold production recently declined to a 90 year low, annual production during 2011 was 190 tonnes, representing almost 8% of total worldwide annual gold production of about 2,500 tonnes.  South Africa’s annual production of gold declined from 400 tonnes in 2001 to only 190 tonnes in 2011, due to lower grade ore deposits and depletion of existing mines.

Proof American Platinum Eagles can be purchased by consumers directly from the U.S. Mint.  The U.S. Mint recently announced that production of the 2012 Proof American Platinum Eagles will be set at 15,000 coins.  The Mint has been producing the proof platinum eagle coins since 2009.  Initial pricing per coin for the Proof American Platinum Eagles was set at $1,692.

Closed Platinum Mines Offset By Stockpile Surplus – Is A Surprise Platinum Rally Coming?

As noted in a recent post, the price of platinum has plunged almost $500 per ounce since last summer (see Platinum – Time To Buy Or Will The Bears Win?).  Industrial and jewelry demand for platinum has decreased substantially due to decreased car sales and a slowing world economy.  Potentially offsetting the weak demand for platinum is the increasingly violent labor strife in South African platinum mines which supply about 75% of world platinum production.

Earlier this year, Impala Platinum Holdings lost production of 120,000 ounces of platinum due to a six week strike and yesterday the world’s third largest platinum producer, Lonmim PLC, suspended most production after violence by rival labor unions left 10 people dead.  According to The Wall Street Journal, “the company was only able to produce metal from previously mined material, with very little fresh mining taking place…The sharply curtailed output threatened year-end targets and crimped supplies of a metal used primarily in automobiles and jewelry.”

What was the impact on the price of platinum due to the sudden closing of a major platinum mine?  Absolutely nothing as can be seen in the chart below.

Courtesy – kitco.com

The disruptions to platinum production have so far been offset by a reduction in demand and a surplus of platinum in world stockpiles according to MiningMX.

A STOCKPILE of 4.5m oz of platinum has accumulated in the global market in the past four years, and this would dampen any liveliness in the price of the valuable metal for at least the next two to three years. “The only solution is a cut in production. I would say a reduction of at least 400,000 oz per year in production capacity is called for,” said Paul Walker, head of precious-metals research at the authoritative Thomson Reuters GFMS, whose annual survey of the platinum market was released last week.

According to him, disruptions in production, like the strike at Impala Platinum in January and February, as well as the recent trend of safety stoppages – which cost about 300,000 oz in lost production – would do nothing to help the recovery in the platinum price. The accumulated global stockpile and waste metal recovered from car wrecks and the jewellery market absorb such shocks.

“I fear the accumulated 4.5m oz has become an obstacle in the market and can no longer just be shrugged off as a statistical deviation as was the case in the past two or three years. Previously we could ascribe it to factors like the downturn in 2008, but we can’t do that anymore,” he said.

The revival in the motor industry also did nothing to help the price to recover, because palladium is increasingly being used in place of platinum in diesel engines.

The stockpile of palladium was even bigger, namely 11.2m oz.

Despite the recent cutbacks in South African platinum production due to labor strife, production has actually increased by small amounts over the past years despite the growing stockpile surplus.

According to industry statistics, a price of $1,900 per ounce is necessary in order to justify new investment in platinum mines.  At current prices, platinum production from existing mines is barely profitable.  World platinum consumption is about 5.5 million ounces.  Under the unlikely scenario that all platinum production in South Africa comes to a complete halt, existing stockpiles would quickly be depleted within a year.

Until the stockpile of surplus platinum is worked off and the auto industry recovers, platinum prices could remain under pressure.  Hedge funds currently have the largest short positions in platinum ever in the futures market.

On a bullish note, all of the bearish factors affecting the price of platinum are well known and therefore discounted into the current price.  The platinum market just might surprise everyone with a rally to higher prices.

What Precious Metal Has Performed Best In 2012 And Where Do We Go From Here?

After the recent volatility in precious metals, let’s take a look at the year to date performance of gold, silver, platinum and palladium.  The new year started off with a strong rally across the entire precious metals group which erased some of the losses seen in the second half of 2011.

The across the board rally in precious metals came to an abrupt halt in early March after serial dollar printer Fed Chairman Bernanke made comments suggesting that further quantitative easing was unnecessary (see The Flash Crash In Gold).  Gold, which had closed at $1781 on February 28, sold off sharply, losing $136.75 per ounce by March 14.  Silver, platinum and palladium also sold off and are currently below the highs of the year seen in late February.

The precious metal with the largest gain to date for 2012 is platinum with an impressive 19% gain.  Silver is up 12.72% on the year, followed by palladium with a 5.72% gain and gold is now in last place with a year to date gain of 4.5%.

Platinum may be the most undervalued of all the precious metals based on the fact that the platinum to gold ratio is at levels not seen since 1986  (see Platinum To Gold Ratio Plunges – Buy Signal or New Metric?).

GOLD SILVER PLATINUM PALLADIUM
JAN 3RD $1,590.00 $28.78 $1,406.00 $664.00
MARCH 19TH $1,661.50 $32.44 $1,673.00 $702.00
$ GAIN $71.50 $3.66 $267.00 $38.00
% GAIN 4.50% 12.72% 19.00% 5.72%

Based on previous history, serious precious metal investors probably gave little credence to Bernanke’s suggestion that further Fed monetary easing was not in the cards.  Indeed, barely a week passed before the Fed Chairman was again discussing a new version of quantitative easing known as “sterilized bond-buying.” The always astute James Grant of Grant’s Interest Rate Observer, dismissed the notion that central bank money printing was about to end anytime soon.  In a recent interview with Bloomberg Television, Grant had this to say.

The price of gold is the reciprocal of the world’s faith in the deeds and words of the likes of Ben Bernanke. The world over, central banks are printing money as it has never been printed before. The European Central Bank has increased the size of its balance sheet at the annual rate of 89%. It’s amazing. The Fed is far behind at only 15%. The Bank of England 67% over the past few months. These are rates of increases in the production of paper currencies we have never seen in the modern age. It takes no effort at all. They simply tap the computer screen.

The full interview with Grant is well worth listening to and can be accessed below.

Where do we go from here in what could turn out to be a very interesting year for precious metals?  Here’s a brief roundup of interesting thoughts and analysis from around the web.

The Golden Trader discusses paper trading and manipulation of precious metal prices along with a technical assessment of gold and silver.

Mint State Gold explains why “all the major signs are showing that the quality rare coin market is starting its long awaiting rally. Let me explain why we could see a 30% move higher by year end.”

Why financial repression should be the focus of investor attention.

Gold and Silver News and Headlines – Gold Owners Get Nervous

Precious metals advanced across the board today, with palladium the stellar performer with a 2.86% gain.  Gold gained $9.70 to $1685.30, silver tacked on $0.48 to $33.53, platinum rose $18 to $1633.00 and palladium jumped $19.00 to $689.00.

Although precious metals recently hit a selling storm (see The Flash Crash in Gold), precious metals remain up strongly on the year and gold is up $257.20 per ounce or 18% over the past year.  The following chart show the gains for the year on the precious metals group.  All prices per the London PM Fix closing price.

GOLD SILVER PLATINUM PALLADIUM
JAN 3RD $1,590.00 $28.78 $1,406.00 $664.00
MARCH 7TH $1,677.50 $33.17 $1,627.00 $678.00
$ GAIN $87.50 $4.39 $221.00 $14.00
% GAIN 5.50% 15.25% 15.72% 2.11%

Here’s a brief round up of some of the latest thoughtful coverage on gold and silver related news.

Free Von Nothaus from the tyranny of unjust government actions – Judging Silver or Something Else?

As I look at the circumstances, I do not see that von Nothaus or his Liberty Dollar products victimized anyone. In contrast, those who chose to keep Federal Reserve Notes and coinage of the U.S. Mint have been victimized by loss of purchasing power. If anything, and I say this with all due respect, it seems to me that it would be more sensible and appropriate to prosecute those who have victimized American citizens through the depreciation of the “money” issued by the U.S. government.

US Mint Drops Price of Gold Products

With all of the pricing data now available, the US Mint’s gold numismatic products are set for a two tier decrease. This will reduce prices by the equivalent of $100 per ounce of gold content.

Owning gold is a “privilege, not a right”.  Why The US Confiscated Gold in 1933 and Can It Happen Again?

We previously stated that gold ownership was made illegal on 1st May 1933. What we did not tell you was that U.S. citizens, under Order 6102, were allowed to own up to $100 in gold coin [+5 ounces].

Congress could easily revoke the privilege again. In fact, at no time during this century has the U.S. government recognized the right of private gold ownership.

The privilege, not right, to own gold was restored to U.S. citizens on the 15th August 1974 (not 1971, when Nixon floated the USD against gold and stopped foreign central banks from converting USD to gold). It is pertinent to the thinking behind this series, to understand the importance to government of gold and that the right to confiscate may not be restricted to individuals or institutions but could embrace a nation or two.

It’s believed that some 60% of Germany’s gold is stored outside of Germany and much of it in the Federal Reserve Bank of New York. If this is the case one has to ask, in the light of the massive currency swaps engineered by the Fed and the E.C.B. to raise the two tranches of cheap money for European banks, “Was gold swapped too, or was it pledged as collateral?”

The public pressure to repatriate national gold reserves has heightened considerably in the last year. Should Germany want its gold back home, we ask, “Can it get it back or has it already been used in these ways?

Germany to Review Bundesbank Gold Reserves in Frankfurt, Paris, London and Federal Reserve Bank of New York

German lawmakers are to review Bundesbank controls of and management of Germany’s gold reserves.  Parliament’s Budget Committee will assess how the central bank manages its inventory of Germany’s gold bullion bars that are believed to be stored in Frankfurt, Paris, London and the Federal Reserve Bank of New York, according to German newspaper Bild.

There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany’s central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves.

The eurozone’s central bank system is massively imbalanced after the ECB’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31% bigger than the German economy, after a second tranche of three-year loans.

The concern is that were the eurozone to collapse, Bundesbank’s losses could be half a trillion euros – more than one-and-a-half times the size of the Germany’s annual budget.

In that scenario, Germany’s national patrimony of gold bullion reserves would be needed to support the currency – whether that be a new euro or a return to the Deutsche mark.

Bernanke Spooks Gold

Instead, this selloff was sparked not by a development, but a non-development. In his address to Congress, Fed Chairman Ben Bernanke offered no clue as to when the Federal Reserve would unleash its next round of quantitative easing.

The markets took this as a sign that the monetary madness is coming to an end, which would bode poorly for precious metals. Metals are increasingly seen as substitutes for continuously debased fiat money, and tend to do well when new liquidity injections are announced.

Bernanke’s failure to telegraph more printing means nothing. Investors are craving a return to normalcy, which means more prudent monetary policy. As a result, many are grasping at straws. But I believe these hopes are premature, and that gold will be buoyed by easy money for quite some time.

In addition, gold will likely be favored by the greatest financial struggle of the coming decade: China’s plans to replace the United States as the dominant economic power.

Buy Japanese Bonds At 0.05% And Get A Gold Coin

Japan began selling special government bonds Monday aimed at raising funds for reconstruction from the March 2011 earthquake and tsunami, saying it will present buyers with commemorative gold coins imprinted with an image of the “miracle pine” that survived the killer tsunami when the bonds mature in three years.

The coins — worth ¥10,000 each, and silver coins worth ¥1,000 — are engraved with the design of the 30-meter-high pine in Rikuzentakata, Iwate Prefecture, that was the only one of about 70,000 pines on a stretch of coast to survive the massive tsunami.

Peter Schiff on why Buffett is wrong about gold – Buffett’s Bursting Bubble

The gold doomsayers have found their champion in the media’s favorite financial advisor and one of the world’s richest men. Warren Buffett, the man dubbed the “Oracle of Omaha,” has repeatedly and publicly denied that gold is an investment, and called gold buyers “speculators” and people “who fear almost all other assets.” In fact, Buffett claims that gold’s rise has the same characteristics as the housing and dot-com bubbles, and it is only a matter of time before it reverses course. He doesn’t mean that the price will decline because of austerity measures and a free-market interest rate, mind you. He just asserts that because he’s deemed it a bubble, it will inevitably burst.

Gold prices will only go down when governments change course and make significant cuts. Until then, gold is not in a bubble. It’s the only way to protect your wealth; and in the current economic condition, it’s poised to go much higher. I think it’s high time Buffett takes to heart his father’s wise words: “For if human liberty is to survive in America, we must win the battle to restore honest money.”

The Volatile Ride To Higher Gold

Back in 1980, Phase Three only lasted for 21 days, but increased 66% in that time span. Considering the ten year time span of Phase One, and my projection for Phase Two, I feel that Phase Three (which starts in 2015) will last for six months and drive gold up to over $6,000 per ounce. If the world’s financial leaders decide to return to a Gold Standard, or if gold bullion confiscation becomes the government’s reaction to severe inflation, my projections would escalate. Possible other government reactions that can affect my projections negatively are: limiting gold ownership, restrictions on transporting or trading, and any Gold windfall profits tax.

 

Platinum To Gold Ratio Plunges – Is This A Buy Signal Or A New Metric?

Platinum is one of the rarest earth elements with the vast majority of deposits found in only one place on earth.  Annual platinum production is only 30 tonnes per year compared to approximately 2,800 tonnes for gold and 23,000 tonnes for silver.

Roughly 80% of annual platinum production comes from only three mines in South Africa.  Siberia and other geographically scattered locations provide the balance of annual platinum production.

Investment demand for platinum constitutes only 10% of annual demand .  Since 90% of platinum demand comes from jewelry and industrial users, the price of platinum can be very volatile.  During an economic downturn,car sales plunge and jewelry is a very discretionary purchase.  During the 2008 financial meltdown, platinum plunged by nearly two thirds of its value compared to a drop of only one third in the price of gold.

 

Platinum - courtesy kitco.com

The ongoing economic turmoil in Europe has contributed to a large drop in the price of platinum.   Last year, platinum declined from $1,887 in August to $1,354 at 2011 year end, a drop of $533 per ounce.  Although platinum has recovered to $1,609, it is considerably undervalued  when viewed through the lens of the platinum to gold ratio.  A platinum to gold ratio below 1.0 is historically a signal that platinum is selling at a bargain price.  The platinum to gold ratio is currently at .95, a level not seen since 1986.

 

Long term ratio - courtesy http://profitimes.com

 

Platinum to gold ratio - courtesy stockcharts.com

Has the long term historical significance of the platinum to gold ratio lost its relevance?  If the world plunges into a deflationary depression, platinum may wind up becoming a much greater bargain at a later date.  The more likely scenario is that a new pricing metric is not being established and that the multi-decade low in the platinum to gold ratio is a major buy signal for platinum.

The central banks of the world have made it abundantly clear that they will print and inflate their way out of the debt crisis.  Ownership of a precious metal such as platinum is one method of maintaining a store of value against depreciating currencies.

Numismatic versions of the platinum coin can be purchased by investors directly from the U.S. Mint.  The 2011 Proof Platinum Eagle has been available since May 26, 2011 with a maximum mintage of 15,000 pieces.  The current price to purchase the 2011 American Eagle one ounce platinum proof coin from the U.S. Mint is $1,892.00 with no order limit.  No sales tax is charged on the purchase and a credit card can be used to pay for the coins.

According to coinupdate.com, the United State Mint may bring back the American Platinum Eagle bullion coins.  The U.S. Mint has not minted the bullion versions of the platinum coin since 2008.  Production of the American Platinum Eagle is not required by law, as is the case for the American gold and silver eagles.  Production of the platinum coins are at the discretion of the Secretary of the Treasury.  The 2008 and earlier bullion version of the one ounce American Platinum Eagle coins are available from coin dealers and are currently priced at around $1,860 each.