Gold Financial Perspective - November 2009

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H.S. Perlin Co., Inc.

Gold Financial Perspective
ONE EXPERT'S OPINION...IS NOW STILL THE TIME TO BUY GOLD?
By Joel Perlin
I have always recommended holding a percentage of one's personal wealth in physical gold. Today, with gold surpassing $1,100, this recommendation is more important than ever.

In the last 12 months, the Federal Reserve has released 2.2 trillion dollars of new currency for the national bailout and the national unemployment rate has ominously crept to 10.2%. With these figures in mind, it is not surprising that many nations have had enough with the U. S. Dollar.

The last two weeks of October witnessed one of the most significant international events associated with gold and currency since Nixon closed the gold window 38 years ago. During this short period, India's Central Bank single handedly created a watershed event by purchasing 200 metric tons of gold, equating to $6.7 billion. With this move, the most populous democracy in the world boldly demonstrated for the United States and the rest of the world that it is tired of simply buying debt and accruing paper. Gold is their alternative choice.

How does this monumental statement affect Americans?

With out-of-control debt and money printing, few options are left for our government short of inflation, taxation and/or an outright devaluation of our currency. Over the last 10 years, the purchasing value of the dollar has been cut in half. Holding U. S. Dollars in permanent savings and wealth managed accounts is proving to be disastrous. This trend will only be exacerbated as we go forward.

On a global basis, the demand for gold is growing in direct proportion to the pain, dissatisfaction and uncertainty created by our economic calamity. As such, gold today is still dramatically undervalued, even at its record height.

With the Reserve Bank of India taking a leading move out of dollars and into gold, we can expect that the Indian population and other nations are not far behind. We should follow suit and continue to purchase gold as long as we have the desire and capacity to preserve the value and increase the strength of our own wealth.

India Spends $6.7 Billion on Gold Safe Haven

Over a two week span the Indian Central Bank purchased 200 metric tons of IMF gold

You may recall from our August Issue that, "On August 7th of this year, the European Central Bank and 18 other central banks around Europe announced a new, five-year agreement to limit their gold sales. The new agreement, which [was] implemented on September 27, 2009, significantly reduce[d] the annual cap of gold sales from their previous agreement of 500 to 400 metric tons per year," with a cap at 2,000 tons over a five year period.

At the time of the announcement, the International Monetary Fund was not yet on board with the limitations, and their prospective plan to sell 403 tons of their gold stores was in the midst of approval. This possible move led many to worry that China or Russia, who were each expected to increase reserves, would speedily buy up the portion.

On September 18, 2009, the IMF issued a press release stating:

The Executive Board of the International Monetary Fund (IMF) today approved gold sales in a volume strictly limited to 403.3 metric tons [...] In accordance with the priority of avoiding disruption of the gold market, the Executive Board adopted modalities for the gold sales consistent with guidelines it had earlier established.

First, the Fund would stand ready to sell gold directly to central banks or other official sector holders if there were to be interest from such holders. Such transactions would redistribute official gold holdings without changing total official holdings. Under the Fund's Articles of Agreement, all gold sales must be conducted at market prices, including direct sales to official holders.

Second, the gold sales could be conducted on-market in a phased manner over time, following the approach adopted successfully by the central banks participating in the Central Bank Gold Agreement.

A little over a month later, on November 2, 2009, the IMF issued another press release stating that over a two week span, from October 19 to October 30 (during which gold averaged $1,049) they sold 200 metric tons of their gold reserves to India's Central Bank, the Reserve Bank of India. The gold, which equates to almost half of the IMF's total sales volume, sold for $6.7 billion and pushed India from the twelfth-largest government holder, past Russia to ninth place. The transaction, the largest of its kind in the last 30 years, pushed gold to records heights.

The IMF claimed that the transaction remained "in accordance with the guiding principle of avoiding disruption of the gold market [and that they are] standing ready for an initial period to sell gold directly to central banks." The statement said nothing of the IMF's original promise to conduct sales "on-market in a phased manner over time [in participation with] the Central Bank Gold Agreement."

With the U.S. marketable debt now up to $7 trillion and low interest rates continuing to weaken the dollar, central banks are on the move to protect their assets. "The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolios with gold," says N.R. Bhanumurthy, a professor at the National Institute of Public Finance and Policy in New Delhi. "Gold is a safe store of value compared to the U.S. dollar." The metal is up 23 percent this year while the U.S. Dollar Index, which measures the USD performance against six major currencies, has fallen 6.1 percent.

Experts project that India's purchase is only the beginning. "It is but a matter of time until China and the IMF announce much of the same," says economist, Dennis Gartman. China, which is currently the world's sixth-largest holder of gold, has increased its gold reserves by 76 percent since 2003.

China Urges Citizens to Buy Gold and Silver

China continues to grow as a world leader in precious metals investing

You may remember from our March Issue that China recently made the monumental move to the world's new top gold producer. The nation's swift increase in its governmental gold reserves, and rising demand from private businesses and citizens, also lifted the country to its position as second highest gold consumer. Now China is taking this one step further by publically encouraging citizens to personally invest 3% to 5% of their net worth in precious metals.

According to a report on China Central Television, the estimated 400 million households in China own on average 0.1 ounces of gold. In most emerging countries, this number lies around one ounce per household. The Chinese are quickly closing this gap. From 2006 to 2007 alone, domestic demand for gold rose 60%.

In addition to the nation's standing promotion of gold, China has now released a public campaign encouraging individuals of all walks of life and financial levels to invest in silver. The country "has introduced its first-ever investment opportunity for silver bullion. The bars are available in 500 grams, 1 kilogram, 2 kilograms and 5 kilograms with a purity of 99.9 percent."

China has had a relationship with silver for centuries. In the 1500s, Chinese trade with Mexico exploded. Spanish galleon ships carried Chinese tea, silks, and spices to Mexico and returned with payment in gold and silver. After the end of China's imperial rule in 1912, the country used silver in their early money. This traditional relationship is even grounded in the Chinese language, in which the word "bank" translates to "silver movement." Today, China is beginning to recapture this connection.

In a recent interview with CCTV, Wang Chunli, General Manager of Beijing Caibai Shopping Mall, stated: "The price for the first batch of the bullion is set very low, close to the cost of the raw material. The investment threshold is not high and it is more suitable for the general public. Silver is much cheaper than gold."

How will this new program affect the rest of the world's precious metal markets? Taking a look back into recent history may give us an answer. On August 21, 2007, the Chinese government made a huge step toward investment freedom by allowing citizens to invest in Hong Kong-list stocks. In one day, Hong Kong's benchmark stock index rose 8.74% and over the following two and a half months, it shot from 11,000 to over 20,000.

Chinese government statistics currently show that the average urban Chinese household has the capability to invest about $1,300 in disposable income. While this may not seem like much, it adds up to about $36 billion in total investment potential. If the Hong Kong-stock shockwave is any indication, the Chinese push toward precious metals will have effects that reach far beyond the country's borders.

The Dull Reality behind the Glitter of Gold Exchange

Mail-in gold refiners and gold party hosts are being exposed for unlawful business practices

2009 has been a big year for gold and the American public. Never before has there been such a large proportion of advertising dedicated to trying to get you to acquire some easy cash by exchanging your unwanted gold valuables. This trend even reached heights of securing a $2.4 million portion of coveted Super Bowl ad space, when Cash4Gold tried to win over the public with such familiar celebrity faces as M.C. Hammer and Ed McMahon.

Amidst the fervor, Cash4Gold and companies like it have had the opportunity to provide a necessary service, particularly as many people have been struggling financially. However, the companies have been serving themselves first, leaving customers with miserly returns.

Online consumer news source, The Consumerist, reported that former Cash4Gold employee Michele Liberis blew the whistle on the gold-exchange giant last November, revealing that doing business with the company was not what many had bargained for. Liberis outlined various questionable practices that included underinsuring mail-in packs, fake claims of packs lost in the mail, shoddy appraisal tactics, short timelines for returns and an extremely low percentage of actual value paid out to customers. She even revealed that Cash4Gold gave employees bonuses for each angry caller they could appease by offering up to three times the value of the customer's original payment. (Read more about the details of the scam here.)

Inspired by Liberis' allegations, the Consumer Report had mystery shoppers send 24 identical gold chains and pendants to several gold exchange companies, including Cash4Gold, GoldKit and GoldPaq. The items were purchased for $175 each and their melt value, based on the spot price of gold at the time the items were received by the companies, was $70. While local pawn shops and jewelers offered the mystery shoppers anywhere from $25 to $50 for the pieces, payments from Cash4Gold and their competitors were drastically different.

According to the Consumerist, "Cash4Gold sent back checks ranging from $7.60 to $12.72 (or 11% to 18% of melt value), the lowest amounts of any firm. But others weren't far behind: GoldKit offered $7.81 to $20.59, and GoldPaq $8.22 to $13.11. [...] The results reinforce advice we've offered before, which is that consumers should not use these highly marketed services because the payments they offer are too low. No matter how nice the person is who gives it to you, a bad deal is still a bad deal." These bad deals are precisely the reason that Cash4Gold can afford to drop $2.4 million for the most expensive ad space on television.

Similar scams have been occurring all over the country as gold parties are increasing in popularity. Because attendees aren't informed about the factors that contribute to the value of their old gold jewelry, many are walking away with much less than they should. Even as some gold parties may provide legitimate offers, the appraisers and hosts are taking a middleman's cut, which ultimately lowers attendees' profit.

Kim States, President of the Better Business Bureau released a statement addressing the issue: "You can have fun and make some money at gold parties if you prepare in advance. Weighing your gold and knowing your jewelry's karat content before going to a gold party will help you understand the value of your items to assist with getting the best deal and avoid being ripped off."

Brian Flores of Fox 5 News took notice of the spreading trend and approached Joel Perlin to find out about the rising gold price and its relationship to the gold parties. Perlin attributes the current price of gold to its role as a "counterbalance to what is going on with our currency. [...] Gold is a storehouse against [the loss of the dollar's] purchasing value, and quite frankly, it's a safe haven." In response to those who are taking advantage of the price to acquire some desperately needed money, Perlin emphasized, "The best policy is to know who you're doing business with."

Read the entire story here.

Volume 5 Issue 5 - November 2009

This newsletter is designed to provide timely and beneficial financial information. Current economic factors affect your personal financial decisions as well as your decisions for gold ownership today. We hope you find the enclosed information helpful and informative.

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