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Hakuna Matata?
By Jon Nadler

September 17, 2007. Ten days after the beginning of the Fed rate cuts (and financial market turmoil) that would eventually bring gold to $1033.90 on March 17 of 2008. That's how long ago it was that gold traded at $720 per ounce. We have now come full circle. The metal is currently showing a 20% loss over one month, and 3.5% on the one year timetable. Our long-stated (and much derided) $732 objective has been achieved, of that there is no doubt. The remaining question now emerging is: has gold seen its lows, or are we at the start of a phase in the mid-to-high $600's? There is plenty of uncertainty on that front, for the moment. Maybe the next Hulbert metric will tell us more. So far, Merv Burak gets the prize for the week's call for new lows.

Fear not, for there will once again be plenty of: " No worries!" and " Back up the truck, honey! "calls coming from the usual suspects' quarters. Don't know, but it seems that most of these trucks must have broken gears, having been in reverse for so long. Along with the alleged 'disconnect' between paper and physical prices. A broken story as well. Anyhow, copper lost 8.72 and lead lost 9.69 percent on the day. Oil? Off a "mere" $5.65 per barrel to $66.53 per barrel. Overnight markets experienced more of the same: the same surging US dollar, declining crude, pessimistic equities, and declining commodities.

The list of slumping currencies still headlines the ruble, the real, and the won (soon to be renamed the rubble, the unreal, and the lost). Moreover, the "Iceland Syndrome" appears to be spreading - this time, apparently starting to affect my parents' old stomping ground, Hungary. In a desperate attempt to stem a flight from the forint, the Magyar central bank raised rates to 11.5% today. Contrasting that move, reasonable expectations that the European central banks will soon cut rates to avoid the (likely) unavoidable.

The Dow caved in again, this time by 500-600 points - margin calls will soon follow. If anyone had doubts about the commodity sector somehow miraculously escaping the current mania for cash, they are searching for new careers right about now. Commodity-trading newsletter writing is so...90's. Gold took out the $732 level and sank as low as $718.90 intra-day ( a $50 loss, at one point). Another sizeable gain in the dollar brought it to 85.60 on the index. Something has to give? Not in this boxing match, not thus far.

New York spot dealings continued to find lower and lower bids, and were off by $45 at $725.00 at last check. While the decline is a perfectly wonderful and timely Diwali present to India, it still raises the possibility that the metal is becoming a "reverse hedge" in a world of crumbling values. Yes, bullion may fall further (targets include $675, and $640 - at this time), but it might lose less than that overpriced fixer-upper, or the sickly-looking basket of stocks the brokers are trying to keep one from tossing away.

Silver fell 60 cents to $9.43. Silver pundits have fallen silent or are trying to distract with stories of parallel universes. Quietly, India is turning this Diwali into a festival of...silver, but not much gold. As for bargain-basement prices, look over to platinum and palladium, as they wear freshly altered price tags of $829 (down $64) and $175 (off $6) on the dire news that US auto sales have not looked this grim in over a of a quarter century.

Gold may even rise, following whatever target the current slump takes it to, perhaps trying for $1K once again over the next 6 to 18 months - this, according to our friend Paul Walker over at GFMS in London. Paul bases his expectations of the four-digit achievement on a decoupling from the commodity complex based on its monetary attributes - some of which have come under serious testing of late. Thus far, that divorce appears to be in question, as gold continues to hold some very tight hands with oil and base metals. But, as always, caveat emptor - or speculator, as the case may be. Personal finance guru Jane Bryant Quinn delves into the chances and the ifs, hows, and whys of gold paying off, in a commentary on Bloomberg's homepage today:





Oct. 22 (Bloomberg) -- Gold is for rich guys -- buying physical gold, that is. The metal's highest and best investment use is as insurance policy against a currency collapse. For that purpose, you need a lot of it, stored around the world. Owning 20 or 30 coins is nice but won't protect your standard of living in a world where dollars are dust.

Gold isn't even a reliable hedge against inflation. It reached $850 an ounce in January 1980, a price not seen again until January 2008. During those intervening 28 years, gold plunged and reared but lost more than half of its purchasing power. For a 1980 investor to break even after inflation, gold would have to reach $2,200.

It might, but how long did you plan to wait?

For the average investor, gold boils down to a speculation on higher prices. The latest run-up started in August 2007, when the housing market visibly started falling apart. From $652, it raced up to $1,003 an ounce last March, zig-zagged back to $747 in September, jumped to $905, then slid to $772 as of yesterday.

Hedge funds drove the market but individuals jumped in, too. So far this year, investors have purchased 611,000 newly minted, one-ounce U.S. gold coins, compared with 315,000 in all of 2007.

"We've seen a switch in appetite, with investors moving from futures to physical gold, either owning it directly or going through exchange-traded funds," says Suki Cooper, an analyst at London-based Barclays Capital.

Coins purchased strictly for their gold value, not their numismatic value, are known as bullion coins. Many countries mint them -- South Africa (Krugerrand), Canada (Maple Leaf), China (Panda), Austria (Philharmonic) and Australia (Kangaroo), among others. The U.S. Mint makes Buffalos and American Eagles. For investment purposes, you want the one-ounce size.

Supply Shrinks

That is, if you can find them. The yearlong run on bullion has dried up the supply of coins for immediate delivery. Everything was out of stock last week at the online dealer onlygold.com. Kitco.com had Maples at 7 percent more than the spot gold price.

"The premium will likely come down 1 or 2 percent when all coin supplies improve a bit," says Jon Nadler, senior analyst for Kitco Metals & Minerals in Montreal.

The various mints project the number of coins they expect to sell each year and produce on demand. Toward the end of each year, they let their inventories run down while gearing up for next year's run. The surge of buyers left them short of high- quality blanks.

Currently, the U.S. Mint is striking only a limited number of 2008 Eagles. The wholesalers are on allocation. No Buffalos are being shipped at all, although a small number might still be minted before the end of the year. By late December, dealers expect to start receiving 2009 coins.

Coin of the Realm

For U.S. investors, American Eagles are the bullion coin of choice. You can put them into individual retirement accounts as long as they remain in their original U.S. Mint capsules. (It's not clear that Buffalos are allowed.)

Eagles also slip through a loophole in the tax reporting law, says Scott Travers, author of "The Coin Collector's Survival Manual." Dealers have to report to the Internal Revenue Service if you sell 25 or more Maples or Krugerrands. They're not required to report your sales of American Eagles and some other coins, although some may do so. (Kitco, in Canada, says it does no tax reporting at all.)

Normally, one-ounce Eagles sell for 5.5 percent to 7.5 percent over the gold price, Nadler says. Small dealers might mark up the price even more.

In this buying panic, I saw online dealers charging as much as 13 percent more than spot gold. Their Web sites warned that there might be a wait before your Eagles could be shipped.

Fool's Gold

On EBay and the Home Shopping Network, coins sell at fantasy prices. A set of Eagles in four different weights was offered on HSN at $4,999.99. In gold, it's worth about $1,450. Prices like these take advantage of neophytes. A coin dealer might sell a four-coin set for $1,850, Travers says.

A cheaper way of buying gold is through an exchange traded fund. The most widely traded fund, SPDR Gold Shares, costs 0.4 percent a year in fees, plus your brokerage commission. You don't own the gold directly. A trust holds large gold bars (warehoused principally in London) and sells shares against them, which are traded on the open market. You can't redeem in gold itself.

It costs even less to buy bullion in a pool account, such as the ones offered by Kitco. Like an ETF, a pool account sells shares in a large bar of warehoused gold. You pay just a hair over the spot gold price, and sell it back to Kitco for just a hair under. There are no annual expenses. For a fee, you can redeem in gold itself. As with ETFs, you depend on the pool's trustee to support its guarantee.

Gold, by the way, is taxed as a collectible -- whether you buy it in the form of coins, ETF shares or an interest in a pool account. Your tax rate on long-term capital gains would be 28 percent, compared with 15 percent on other assets. Only a significant price gain (or currency collapse) redeems your bet."

We now have to get back to the drawing board and sketch the next phase out. The repair work to be done is quite daunting, while the path of least resistance still points to commodities on sale. We expect intense accelerated and exaggerated patterns over the next three weeks. What else is new. Just don't worry. Too much. Not good for health.
 



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