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Dollar Rally Causes Gold/Silver Collapse

January 2005

As the graph shows, the dollar suffered a steady decline September through November. As the gold and silver graphs show, both metals enjoyed solid gains during the dollar’s woes. However, in early December the dollar rallied. It was a technical rally for no fundamentals support a dollar rise. By near unanimous consensus, the dollar has to go much lower because of the balance of trade deficit, the federal budget deficit, and Washington’s complete disregard for the country’s financial state of affairs. You can add to this the high level of U.S. debt, both government and private.

The dollar’s early December rise resulted in gold, and especially silver, dropping precipitously. In five days, gold dropped $22, a 5% decline. Silver, which is usually the case, suffered an even larger percentage decline, falling 16% with a decline of $1.29. The question is, as this is written, will gold and silver see further declines before returning to their upward marches?

CMi believes that this gold/silver bull market has years to go. There is no way of putting a time frame on this bull market because there is no way of knowing when Washington will take the necessary steps to put the nation’s financial affairs in order. Because the dollar is the world’s reserve currency, it may take a long time to bring the dollar to its knees. The dollar will sink lower, but it will remain an integral part of the world’s financial system.

Despite the euro’s acceptance, it is not yet widely enough circulated to replace the dollar. As The Economist has noted, “In the future no one currency, such as the euro, is likely to take over. Instead, the world might drift towards a multiple reserve-currency system shared among the dollar, the euro and the yen (or indeed the yuan at some time in the future).”

What would a multiple reserve currency system mean to Americans? A lower standard of living, brought on by higher costs of borrowing, more expensive imported goods (including oil), and Washington’s reduced ability to force freshly printed dollars on the world. Under a multiple reserve currency system, Washington would have to get its house in order, or the dollar would be subjugated to secondary status.

At such time, the state of our country’s financial affairs will become a national issue, debated across the land, even the primary focus of a presidential campaign. Until that time, however, we can expect the dollar to continue to decline, interrupted with rallies, such as the early December one, which will cause gold/silver investors to question the wisdom of owning gold and silver.

A falling dollar alone will not solve our balance of trade deficit. Washington must cut spending, and Americans must become savers, not the reckless spenders that current statistics suggest we are. When we see those things happening, we can start looking for alternative investments, but that time appears to be a long way off.

With the U.S. trade gap at a record $496.5 billion last year, and the current account deficit reaching $166.2 billion in the second quarter, currency forecasters reckon the market is setting a value for the dollar that will take it toward $1.40 per euro and through 105 yen. In November 2004, the euro broke through the magic mark of $1.30 per euro. This represented a rise of 52% for the euro against the dollar since early 2002, when the dollar had reached its last peak.

The Economist estimates that “a fall in the dollar sufficient to close the current-account deficit might destroy the dollar’s safe-haven status. If the dollar falls by another 30%, as some predict, it would amount to the biggest default in history: not a conventional default on debt service, but default by stealth, wiping trillions off the value of foreigners’ dollar assets.” Foreigners presently hold some $11 trillion in U.S. assets. Such a fall would also mean dire consequences for Americans who elect to hold dollar-denominated assets, such as bonds, annuities, CDs, savings accounts, etc. Price inflation is sure to follow any such massive decline in the dollar.

Many investors assert that George Bush’s reelection means America has decided to solve its problems, and that assertion is certainly supported by the stock market’s stellar performance this year. However, the pace of the dollar’s decline has picked up since Bush’s reelection, and it was President Bush’s heavy spending that pushed U.S. finances into the red. (Bush has yet to veto a single bill from Congress, much less a spending bill.)

George Bush sees his legacy in foreign affairs, not domestic policy. Hardly a speech or press conference goes by without the President talking about Afghanistan or Iraq. Presently, he is taking pounding on Rumsfeld’s handing of Iraq, but the President is not deterred. He seems determined to pay whatever price necessary to gain complete control of Iraq. Such policies will lead to further pressure on the dollar, for the Bush administration (and the Fed) is content to finance the war with loans and freshly printed dollars-not tax increases. There is no cavalry riding to the dollar’s rescue.

Where the dollar has failed is as a store of value. Since 1960 the dollar has fallen by around two-thirds against the euro (using Germany’s currency as a proxy before 1999) and the yen. The euro area, unlike America, is a net creditor. Never before has the guardian of the world’s reserve currency been its biggest net debtor. And a debtor may be tempted to use devaluation to reduce its external deficit-hardly an admirable move for the issuer of a reserve currency.

For almost two decades, economists have worried about America’s current-account deficit and predicted a plunge in the dollar and a hard landing for the economy. The dollar did indeed fall sharply in the late 1980s, but with few ill effects on the economy. So why worry more now?

One good reason is that the current-account deficit, now running at close to 6% of GDP, is almost twice as big as at its peak in the late 1980s, and current policies will keep our current account deficit widening. Second, in the 1980s we were still a net foreign creditor. Today we have net foreign liabilities, which are expected to reach $3.3 trillion, or 28% of GDP, by the end of 2004.

The dollar’s share of global foreign-exchange reserves has fallen from 80% in the mid-1970s to around 65% today, which seems to be a road traveled before. In 1913, at the height of its empire, Britain was the world’s biggest creditor. Within 40 years, after two costly world wars and economic mismanagement, it became a net debtor and the dollar replaced the pound sterling as the world’s reserve currency.

Still, dislodging an incumbent reserve currency can take years. Sterling maintained a central international role for at least half a century after America’s GDP overtook Britain’s at the end of the 19th century. But sterling did eventually lose status as the world’s primary reserve currency. If America continues on its profligate path, the dollar is likely to suffer a similar fate.

During sterling’s fall from grace, astute holders of sterling converted to dollars, which then were “as good as gold.” Today, no paper currency is as good as gold, leaving gold itself the ultimate safe-haven for the times.

Understanding Spot, Premiums, and Spreads


New investors to the precious metals markets often mistakenly think that they can buy gold coins at spot, or the price of gold that they see on the evening news or in the newspaper, which may or may not be valid spot prices. Gold coins cannot, with rare exceptions, be bought at spot.

Spot is the price at which commercial quantities of metals change hands, for delivery and payment within 48 hours. The “spot market” is often called the “cash market.” The gold being bought and sold is in raw bullion form, large odd-weight 400-oz bars.

When the media report gold prices, they generally mean the nearby COMEX futures contract. Still, some newspapers report spot prices as released by major precious metals firms, such as Johnson Matthey, Engelhard, and Handy&Harman. (For brevity’s sake, in this discussion, we often will generally use gold; however, silver, platinum or palladium could be substituted.)

So, when the media report precious metals prices, the prices may or may not be valid spot prices. Even if they are valid, they are old spot prices.

Gold trades on an exchange, somewhere in the world, nearly 24 hours a day, five days a week, with even a Hong Kong market on Saturday mornings, which means a Friday evening market in the U.S. During normal business hours, gold is trading somewhere, and that trading greatly influences spot but does not determine what spot is. Determining spot gets a little complicated.

There is no final authority for spot. Every major precious metals dealer determines spot for himself. When CMi calls a wholesaler and asks for prices, the dealer usually starts with, “I’m calling spot…”

In calculating spot, the “cost of carry” is taken into consideration. The “cost of carry” involves interest rates, storage fees at depositories, and getting “good delivery” gold. Now, grasping the concept of “good delivery” is fun.

Because all major U.S. gold dealers hedge their positions in the futures markets, primarily on the COMEX, they have to allow for the possible cost of taking delivery on a COMEX contract and having that gold converted into today’s acceptable “good delivery” gold.

Backing up COMEX contracts are decades-old 995 fine odd-weight gold bars, which used to be the COMEX standard. If you take delivery of a COMEX contract, you will most likely get one of these odd-weight 995 fine bars. However, standards have changed.

Today “good delivery” is 9999 fine gold, and new gold delivered to any of the four COMEX-approved depositories against futures contracts has to be in 400-oz 9999 fine bars. The bars also have to be delivered from and bear the hallmark of approved refineries, of which there are approximately sixty worldwide. Not just anyone can deliver gold against COMEX contracts. The bars being delivered can have a 5% leeway, meaning they can weigh between 380 and 420 troy ounces.

So, the COMEX has a double standard. If you take delivery, you get 100-oz 995 bars. But deliveries against a contract have to be 9999 purity, plus be from an approved refinery.

As complicated as this may seem, gold dealers are quite proficient at calculating spot, so much so that spot between dealers varies by only pennies, which means an efficient market. The challenge we run into at CMi is making callers understand that Kitco spots are usually below the market.

Kitco is a Canadian refinery that makes its spot prices available via the Interest, even letting other precious metals dealers import Kitco prices for uses on their websites. (CMi imports Kitco prices for its “24-hour” prices on its Spot Prices page.) Kitco prices involve bids and asks, which for years carried a fifty-cent spread on gold and a two-cent spread on silver. However, recently we have seen Kitco spread gold $1 and silver four cents. As the metals prices move higher and become more volatile, we can expect the spreads to widen further.

People selling to Kitco do so based on the bid. Purchasers’ prices are based on the ask. Other dealers operate with bids and asks, while some use one price for spot. The purpose of the spread, the difference between the bid and the ask, is to increase the firms’ chances of making profits on trades. (Not all precious metals trades are completed at a profit, because of volatility, which is discussed later.).

When Kitco prices are exported to other websites, the bids are posted, which means that most persons looking at Kitco prices are seeing low spot prices. Additionally, sometimes Kitco’s prices are simply off the market, probably because of a computer programming glitch.

Kitco pulls its prices from the COMEX when it is open, and from the ACCESS electronic market the rest of the time. When these two exchanges are closed, Kitco prices do not change. However, spot can change when these two exchanges are closed because trading in gold continues.

If buying is heavy, the dealers move up their spot prices; likewise, if the dealers are taking in a lot of metal while the exchanges are closed, spots are lowered.


Premiums are the markups that gold and silver coins and other forms of the metals sell above spot. Several factors influence premiums: supply and demand; the issuing mint’s markup or the producing foundry’s markup; the volatility of the metal; and, the selling dealer’s add on. Premiums are best understood by discussing premiums for various items.

Premiums on 1-oz Gold Eagles are capped by U.S. Mint production. As demand for Eagles rises, the Mint ramps up production. Only under unusual circumstances do Gold Eagle premiums rise above norms. One such instance occurred in late 2003. (And, late 2004, as this is being written.)

The demand for 1-oz Gold Eagles was strong as gold pushed above $400. However, the Mint ran out of 2003 1-oz Gold Eagles because it had already switched production to 2004-dated coins. Consequently, Gold Eagles sold at increased premiums of about $3 each in December 2003. When the Mint shipped 2004 coins in early January 2004, Gold Eagle premiums returned to normal. (Although by law the U.S. Mint can produce coins dated before that calendar year rolls around, the Mint cannot ship those coins until that year begins.)

In short, the Mint misjudged the demand for 1-oz Gold Eagles, resulting in a temporary shortage, which in turn resulted in temporarily higher premiums. Conversely, in 2000, the Mint overestimated demand and produced too many 1-oz Gold Eagles, resulting in 2000-dated Gold Eagles being sold into late spring of 2001. Despite the over-supply at the Mint, the Mint did not lower prices to stimulate sales. The Mint simply waited on demand to return. The Mint also required its authorized dealers to take a certain number of 2000-dated coins with their Gold Eagle orders in 2001.

With the 1-oz Krugerrand, another popular gold bullion coin, the premium is simply a matter of supply and demand. Although the South African Mint currently produces Krugerrands, demand in the U.S. is not such that the South African Mint can sell into the U.S. market and make a profit. Ample supplies of secondary market Krugerrands meet the demand.

Because Gold Eagles are the best selling 1-oz gold coins in the U.S., they have become the standard by which other coins are measured. For example, when Krugerrands sell $10 less than Gold Eagles, “Rands” are said to be selling at a $10 discount to Eagles. During a strong gold bullion coin market, such as before the invasion of Iraq in February 2003, Krugerrand prices climbed to within a few dollars of Gold Eagle prices.

While the U.S. Mint can cap Gold Eagle premiums by producing more coins, it can do nothing to stop Gold Eagle premiums from falling. (The U.S. Mint does not make a “two-way market” in the coins it mints. The Mint only sells.) For example, prior to 2000, in anticipation of the world’s computers failing, Y2K buyers loaded up on Gold Eagles.

However, when 2000 rolled around and the world did not come to an end, Y2K buyers began to sell. Y2K buyers had not bought gold and silver because they feared a collapse of the dollar but because they feared banks would fail and ATMs would quit spitting out $20 bills. When banks encountered no problems, Gold Eagles poured into the market, driving the premium down to as low as $6 for some time. Rands sold at spot, one of those rare exceptions.

Supply and demand determine the premiums on circulated pre-1965 U.S. 90% silver coins. In the 1970s and 1980s, at times, circ 90% coins sold at $2.50 to $3.00 an ounce above spot. In the mid-1990s, when investor interest in the metals waned, 90% coins sold at spot. In 1999, when concerns about Y2K proliferated, 90% coin premiums rose 50%. As soon as Y2K fears proved to be unfounded, 90% coins poured into the market, and within a few months 90% coins sold only thirty to forty cents an ounce above spot.

Interestingly, during the all of the 1970s and the 1980s, millions of ounces of silver in 90% form resided in precious metals depositories, and orders for 100 or 200 bags ($1,000 face, effectively 715 ounces of silver) could be filled with a phone call to any one of five or six precious metals trading desks. Further, as recently as the early 1990s, COMEX-approved depositories held in excess of 300 million of ounces of 999 fine silver bullion. Yet, in face of that abundance of silver, 90% bags picked up solid premiums during periods of strong buying.

Today, silver supplies are low, compared with recent decades. COMEX-approved depositories hold only a little more than 100 million ounces in bullion, and an order for only forty to fifty bags of 90% could take three phone calls to fill. Despite the scarcity of silver in all forms, 90% bags sell at smaller premiums over spot than 100-oz silver bars. Strong precious metals buying by the public could lift premiums on 90% bags to $2.50 – $3.00 an ounce over spot, maybe higher.

As noted above, the premiums on Gold Eagles are capped by new production. When demand increases, the U.S. Mint cranks out more coins. The same is true for silver bullion bars and 1-oz rounds. When demand increases, foundries simply produce more, thereby capping premiums. However, when demand for bullion bars slips, their premiums can fall if bars from secondary sources come into the market in larger quantities than buyers are off taking. This happened twice in 2004.

In March and November, when silver pushed toward the $8 level, 100-oz silver bars and 1-oz silver rounds poured into the market. The products being sold were mostly Johnson Matthey and Engelhard 100-oz 999 fine silver bars, 1-oz generic silver rounds, and some Engelhard 1-oz silver Prospectors, all from the 1970s and the 1980s. Although there was considerable buying by the public, there was not enough to offset the selling, and premiums dropped.

One hundred ounce silver bars sold as low as $.25 per ounce over spot and 1-oz silver rounds at $.45 over spot. Contrast this with only two years ago when silver was trading below $5 an ounce and there were few sellers. Orders had to be filled with new products from foundries and mints. Then 100-oz silver bars sold at $.60/oz over spot and 1-oz silver rounds at $.80 over. It costs about $.60/oz to deliver new 100-oz silver bars to the market, whether spot silver is at $4.50 or $8.00.

However, when prices collapsed in April and December, bargain hunters rushed to the market and selling dried up. This resulted in premiums climbing back toward the $.60/oz for 100-oz bars and $.80/oz for 1-oz rounds.

In 1999, circulated 90% silver coins picked up premiums of 50% because of Y2K buying. And, the foundries were kept busy turning out 100-oz bars but especially 1-oz silver rounds. Today, circ 90% sells for a few pennies over spot, and when silver pushed toward $8, 100-oz silver bars carried about half the premiums they did in 1999.

As a rule, the smaller the silver bullion unit, the higher the premium. For example 1-oz silver rounds carry higher premiums than 100-oz silver bars, which sell at higher premiums than 1,000-oz bars.

The primary reason coins carry premiums is because there is a greater demand for coins than for bars. Since the Lydians minted the first coins about 600 B.C., most governments have minted coins, not bars. This is one reason coins have become the preferred form for individuals when they buy gold.

Coins are more popular than bars because coins are minted by governments, which assures buyers that they are getting the amount of gold stamped on the coins. (A strict definition of a coin says it is a piece of metal of a known weight and fineness. However, the word coin nowadays is reserved for a government-issued legal tender piece of metal with a “face value” stamped on it. For example, a dime is by law one-tenth of a dollar. [Let’s reserve the definition of a dollar for another time.])

Although coins make up the bulk of the “physicals” gold market, investors who choose to go with 1-oz gold bars that have been produced by such respected firms as PAMP, Credit Suisse, Johnson Matthey, Metalor, and Engelhard can do so with confidence. Still, among individuals, millions more ounces of gold coins are traded every year than are gold bars.

Volatility also affects premiums. When prices changes are big and occur quickly, premiums usually increase as wholesalers and dealers seek to protect themselves from unfavorable price swings. When the public is both buying and selling, premiums tend to decrease. Increased public participation in the metals also narrows spreads, as explained below.

A final note on premiums: The U.S. Mint sells Gold Eagles at percentage markups over spot and Silver Eagles at fixed markups. We do not know the precise markups on either GEs or SEs because CMi cannot buy from the U.S. Mint. We must buy from authorized wholesalers who are do not share that information. We suspect GEs are sold out the door at about 3% over spot and that SEs are sold at premiums of $1 or higher.

Because of this pricing policy, as precious metals prices move higher, the absolute markups over spot increase on Gold Eagles, while the percentage markups on Silver Eagles decline.

The Spread

The spread is the difference between the prices at which you buy and the prices at which you sell. The spread enables dealers (and wholesalers) to operate at a profit.

As with premiums, factors influencing the spread include supply and demand, the issuing mint’s markup or the producing foundry’s markup, the volatility of the metal, and, the selling dealer’s add on. Coins in abundance and those for which there is good demand, such as Gold Eagles and Krugerrands, trade with smaller spreads than do, say, Mexican 50 Pesos.

A fact: fractional-ounce coins have bigger spreads than 1-oz coins, primarily for two reasons. All mints markup the smaller coins more than the 1-oz coins. And, there is less demand for fractional-ounce coins, which means wholesalers have to sit on them longer, increasing the “cost of carry.”

Another fact: the spread is smaller for large purchases than for small purchases. Investors who are financially able to buy 100 ounces of gold get lower prices than those who buy ten ounces. Not by a whole lot, but large purchasers get better prices.

Volatility can increase the spread. In recent months, gold prices have marched higher, but in a somewhat orderly fashion. But, if the dollar takes the drop that some economists are predicting, then gold may start moving around $15-$20 a day. Such volatility definitely would increase spreads and premiums.

A future issue of Monetary Digest will cover other aspects of the precious metals markets, such as the London fix, the ACCESS market, and “24-hour gold.”

Scam Alert

Longtime CMi clients know the contempt with which we hold telemarketers’ promotions of overpriced numismatic and collectible coins. Our disdain stems from the unbelievable horror stories we have been told by unsuspecting persons who have been conned. It is absolute that the more helpless the victims, the more money the con artists will try to extract. No one who can write a check is safe. We have talked to people in their nineties who have been taken.

We went public with our condemnation of this practice in the May 1998 issue of our Monetary Digest in an article titled Myths, Misunderstandings, and Outright Lies. When we launched our first website, Myths, Misunderstandings, and Outright Lies became a permanent fixture. Today, the article is legendary in the coin industry, lauded by many, but despised by telemarketers.

Our new website prominently displays a link to the article. Monetary Digest readers who have not perused the article are urged to do so. Any readers who do not have access to the Internet but would like a copy of Myths, Misunderstandings, and Outright Lies need only ask for a copy by calling or writing.

As explained in Myths, Misunderstandings, and Outright Lies, in the mid-1980s two grading services sprang up to counter the practice of individual firms flagrantly overgrading coins. Today, those two services, PCGS and NGC, are part and parcel to coin collecting. Even coin dealers with thirty years’ experience, who are probably much more qualified to grade coins than are the grading service employees, meekly submit coins for one of the services’ stamp of approval.

When dealing with coins that once circulated as money, “slabbing,” as the practice of submitting coins to grading services is called, makes sense. The services are-supposedly-unbiased third parties who grade the coins for the benefit of sellers and buyers alike. The wide acceptance of PCGS and NGC coins validates this practice.

When the grading services were launched, PCGS (I believe it was.) announced they would not grade modern coins. PCGS’s goal was to foster the development and the veracity of collecting genuine numismatic coins. However, money changes things.

PCGS and NGC charge fees for grading coins. The more coins the grading services slab, the more they earn. So today, PCGS and NGC will slab modern coins, and, unfortunately, this causes unknowledgeable persons to believe that modern coins have added value if they have been slabbed. They do not.

True, a few slabbed modern coins have brought higher than market prices on ebay, but ebay is not the real world. Too many ebay buyers fall into the unknowledgeable camp, and sometimes “auction fever” takes over, and coins sell at higher prices than warranted. However, when slabbed modern coins make it back to dealers’ inventories, they command no higher prices than unslabbed coins. This is certainly true with Gold Eagles and Silver Eagles, the most frequently slabbed modern bullion coins.

Gold Eagles and Silver Eagles have never been used as money and, therefore, show absolutely no wear. A few have been used for jewelry, but most have remained in their original tubes and are still in pristine condition. Consequently, nearly all Gold Eagles and Silver Eagles submitted to the grading services come back MS-69 or MS-70.

Considering that the bulk of GEs and SEs submitted have never been touched by human hands, one has to ask why all coins do not come back graded MS-70, the highest grade awarded. Promoters of slabbed modern coins would tell you that it is “the quality of the strike.” They further assert that coins struck early in a die’s life receive better “strikes.” This is telemarketer mumbo jumbo used in attempts to impart greater value to modern coins.

More than ten million 1-oz Gold Eagles have been minted. For Silver Eagles, the total balloons to more than 125 million. Because most of these coins would grade MS-69 or MS-70 if submitted to PCGS or NGC, real coin collectors and numismatists have absolutely no interest in slabbed GEs and SEs. Promoters use the acceptance of grading services to imply added value that simply does not exist. PCGS and NGC go along with the scam because they earn fees grading the coins.

The principals at PCGS and NGC know what is going on with the grading and promotion of modern bullion coins. The industry would have still more respect for PCGS and NGC if they had continued to refuse to grade modern coins. Money has a way of clouding one’s vision. Why turn down grading fees just because the coins are being used to hoodwink the unwary? Monetary Digest readers have been forewarned.

Some final observations on the grading services. Grading services came to life because of the rampant practice of overgrading, which led to major rip-offs of unsuspecting gold coin buyers. The slabbing of coins has pretty much ended the practice of overgrading. Unfortunately, the slabbing of coins does nothing to stamp out the overpricing of coins, which remains a major problem for investors.

Now, though, the grading services are part and parcel to the promotion of bullion coins, which has become a problem not so much for coin collectors but new investors who, wanting only to invest in gold coins, sadly fall victims to telemarketer stories. PCGS and NGC helped stamp out one unscrupulous practice but are implicit in another. Because slabbed coins are so widely received, the slabbing of modern coins lends validity to them that they do not deserve, and that is a shame. The services are tremendous assets to coin collecting. They should have never started grading modern bullion coins.

Gold Horses Sell Out

In October, the 1-oz Gold Horses became the second coin in The Perth Mint Lunar Series to reach the production cap of 30,000 coins. The year 2000 1-oz Gold Dragon was the first coin to sell out. Immediately on selling out, the 1-oz Gold Horses picked up small premiums over the 1-oz Lunar Series gold coins that have not yet sold out.

As long as Gold Horses carry only small premiums, aggressive gold bullion coin investors should consider buying Gold Horses. Although the dragon is by far the most popular creature in the Lunar Calendar, the horse is a strong second. After the horse, none of the other animals is a strong third.

Investors not wanting to pay the increased premium on Gold Horses should go with the 2001 1-oz Gold Snakes, the sixth coin in the Lunar Series. Until the Gold Snakes reach their production cap, they will be available at the same prices as new 1-oz Gold Eagles.

In addition to being the second most popular animal in the Lunar Calendar, horses are immensely popular in the Western World. This is especially true in the United States, where we have been brought up on Western movies and where tens of thousands of Americans keep horses for enjoyment, from showing them to horseback riding. Additionally, horse racing is one of the most popular spectator sports in America.

Gold bullion coin investors can profit two ways by going with the Lunar Series 1-oz gold coins: One, by an increase in the price of gold; and two, by an increase in the premiums after the coins reach their production caps and The Perth Mint no longer sells them. For a further discussion of The Perth Mint’s Lunar Series, read our Perth Mint Lunar Series Overview on our new website

CMi is confident that precious metals prices are in a long-term bull market and recommends that investors consider the Lunar Coins when investing in gold. As long as the 2002 1-oz Gold Horses carry only small premiums, investors should consider buying them. However, investors who want to pay no additional premium for new gold bullion coins should take a look at Gold Snakes, which will probably be the third 1-oz gold coin in the Lunar Series to sell out.

Although snakes are not endearing creatures, the Lunar Series Gold Snakes have been big sellers since they were released. More 1-oz Gold Snakes have been sold than any of the other 1-oz gold Lunar Series coins that have not sold out. That is probably because of the exquisite craftsmanship in the Snake coins.

First Gold Souk Opens in Inda

Souks, the Arabic word for bazaars, have long played important roles in the Middle East gold markets. Now, souks are being opened in the second largest country in the world. India’s first souk opened in October at Gurgaon, in the National Capital region.

About 70 retailers, including some of the world’s leading brands, have committed to the souk, locking up about 65% of the retail space. Retailers will offer not only jewelry but also other consumer products, including watches and lifestyle accessories. Aerens Group, which opened the souk, is North India’s leading commercial real-estate developer. Aerens and has plans for another nine Indian souks over the next three years.

India is now the world’s largest country in terms of jewelry off-take, making it appropriate that souks be opening there. In 1994 India accounted for 12% of the world’s gold jewelry demand. By 1998 this had risen, because of the country liberalized laws toward individuals’ ownership of gold, to 21% of total off-take. Now, though, India’s market share is currently closer to 19% of the total.

In the 1980s, the Middle East was the largest consumer of gold jewelry. Toward the end of the 1980s, however, the Far East, as a whole, overtook the Middle East in terms of gold jewelry consumption. India is the engine that is pulling the Far East gold train.

Although most people think of China when it comes to the Far East and gold, India may remain world’s largest consumer of gold jewelry for a long time to come. Some forecasts see India overtaking China as the world’s most populous country in twenty years or so. Further, India’s middle class is larger than the entire population of the United States.

The Middle East remains one of the world’s important gold regions, and gold souks there are renown. The souk in Dubai is world famous for its hundreds of jewelry stores crammed against each other as vendors hawk their wares. Istanbul is also famous for its souks, which are immensely popular with tourists.

Most Middle Eastern and Far Eastern gold jewelry is 22-karat, what in the West often is called “bullion jewelry” because it has a much smaller markup than does 14-karat gold jewelry. In the West, but especially in the United States, jewelry is purchased as an ornament, often to house and show off more costly precious stones. In the Middle East and the Far East, gold jewelry can be looked upon more as an investment, which is why India is such a large consumer of gold jewelry.

The success of these souks on the Indian jewelry industry will be of interest, especially because Aerens Group may open souks in the UK and the US. The concept of buying “bullion jewelry” would be new to Americans, but in an inflationary climate bullion jewelry could become popular.


Our position remains that silver will outperform gold in this precious metals bull market, for several reasons. In past precious metals bull markets, silver has enjoyed higher percentage gains than has gold. And, this time there are other reasons to believe that silver will again outperform gold. Primarily, a critical silver shortage has developed.

In 1980, silver soared to $50 while hundreds of millions of ounces of silver filled precious metals warehouses. As recently as ten years ago, silver stocks for backing futures trading around the world topped 350 million ounces; today that number is below 150 million. Of those 150 million ounces, COMEX-approved warehouses hold some 100 million ounces. Ten years ago, COMEX warehouses held more than 260 million ounces.

In 1980, official government silver inventories stood at 325 million ounces; today, the number is 120 million ounces. Included in the 325 million ounces were 189 million in our own Strategic Stockpile. Today, the US government is out of silver, having used the last of the Strategic Stockpile to mint Silver Eagles and commemorative silver coins.

Further, the masses have yet to come to the gold and silver market. The masses prefer silver, probably because they get more metal for their money, and in the aggregate the masses have many times more money than the wealthy.

Another upward pressure on the price of silver is the massive (and growing) industrial demand, which has resulted in a “production deficit,” one that has run for thirteen years, with no end in sight. The future for silver is bright indeed, and to those investors who can handle silver’s bulk and weight we recommend silver.


Presently, circulated 90% silver coins carry premiums of about $0.30/oz. A good reason for choosing 90% coins is that they often pick up high premiums in precious metals bull markets and during periods of heavy public buying, even without a bull market. In 1999, during the Y2K buying frenzy, circulated bags sold at 50% premiums over the value of their silver content.

For investors wanting a pure silver play and wanting silver in a convenient form, 100-oz bars are recommended. As this is written, 100-oz silver bars are selling for $.45/oz over spot. In a market in which the public is buying, 100-oz bars sell for $.60/oz premiums.

Investors wanting pure silver and “survival coins” should go with 1-oz silver rounds. We sold out of the Mexican 1-oz Silver Libertads mentioned in the last Monetary Digest, but we usually have 1-oz generic rounds and we often have Engelhard Prospectors, which are by far the most popular 1-oz silver rounds ever minted.


The 1-oz Gold Eagles remain the most popular gold bullion coins. Krugerrands are popular because they continue to sell at a discount to Gold Eagles. Krugerrands are the same size, weight, and purity as Gold Eagles.

CMi recommends that aggressive long-term investors consider the 2002 1-oz Gold Horse, the seventh coin in The Perth Mint’s 12-coin Lunar Series. The 1-oz Gold Horses have sold out but are still available at small premiums over the other Lunar Series coins that have not sold out. Investors not wanting the pay the added premium on Gold Horses should go with the 2001 1-oz Gold Snakes, which sell at the same price as new 1-oz Gold Eagles.

Some investors, on hearing about the Lunar Series coins, say that they want only to invest in gold bullion coins, that they want the “most bullion for the money.” Many of these investors opt for Krugerrands, which often sell $10 a coin back of Gold Eagles. That is understandable.

Still, others elect to invest in Gold Eagles, despite the $10 per coin higher price. Frankly, investors who are buying Gold Eagles should go with the 2001 1-oz Gold Snakes. Both Eagles and Snakes contain exactly one ounce of gold, and both are turned out by government mints recognized around the world. Readers with access to the Internet should visit out new website and peruse the Perth Mint Lunar Series Overview to better understand the opportunity that the Lunar Series coins offer.


CMi believes that platinum is too high compared with gold and silver and should be avoided at this time. We have said this for more than three years.


When palladium soared above the price of gold in 2000, we were skeptical. But, we were wrong. Less than a year later, palladium topped $1000; however, just as quickly as palladium went up, it came down. Now, with palladium trading below $200, it looks cheap.

Palladium may be cheap here, but the recent Johnson Matthey review of palladium showed a one million ounce oversupply. Further, investors need keep in mind that a little more than a year ago palladium traded at $175. Of course, one could argue that the reason palladium is cheap is because of the oversupply. Continuing this argument, if investors want low prices, they have to buy when things look bleak, like during a period of over supply.

CMi believes that most investors should go with gold or silver. Investors liking palladium should keep it to a small percentage of their portfolios. If palladium were to drop back to the $175 level, it would be a good speculation.