While gold, silver, and palladium showed signs of renewed strength in October, steadily gaining back losses incurred earlier in the month, platinum never fully recovered from steep declines suffered during the first few trading sessions. Trading near the $1,150 mark at the beginning of October, platinum closed at $1,080 on October 31, a multi-month low for the white metal.
Gold stumbled early in response to record low oil prices, but came back strong, decoupling from oil to push past the $600 barrier for the first time in more than a month. In typical fashion, silver followed the path carved out by gold, dipping below $10.61 before embarking on an extended rally that brought it to a close at $12.10. Finally, after sputtering during the first week of October, spot palladium shot up to touch $340 mid-month on stronger-than-projected physical demand, before settling in comfortably at the $330 level by month's end.
October Gold/Silver Ratio
Beginning the month near 54, the gold/silver ratio — the quantity of silver (in Troy ounces) required to purchase an ounce of gold — edged slightly lower to 49 by the end of October, returning to the level seen six months ago in May. For a graphic view of this trend, see the charts contained in the sidebar at right.
| October Spot Price Summary (U.S. Dollars) | ||||
| Silver | Gold | Palladium | Platinum | |
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| High | $12.29 | $611.10 | $340.00 | $1153.00 |
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| Low | $10.61 | $561.25 | $296.00 | $1054.00 |
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| Open | $11.45 | $603.50 | $316.00 | $1153.00 |
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| Close | $12.10 | $602.20 | $326.00 | $1080.00 |
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CONTENTS
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Market Summary - October 2006 |
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Will Oil's Lows Sink Gold? |
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A Friendly Referral |
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Factors Affecting Gold and Silver |
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Precious Metals Worldwide News |
ABOUT NORTHWEST TERRITORIAL MINT PRECIOUS METALS MONTHLY
Combining market summary information and insightful analysis, this publication offers an insider’s perspective on the numbers, trends, and moves that drive the precious metals market, allowing you to stay on top of the most important investment news each month without investing hours of your precious time.
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FEEDBACK
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CHARTS
The following charts display the daily low and high spot price of each metal for the month of October, 2006. Source: Northwest Territorial Mint spot prices as posted at nwtmintbullion.com.
The following charts display the daily spot price range of each metal for the six months ending October 31, 2006.
Will Oil's Lows Sink Gold?
by Ross Hansen
After a summer filled with global political crises, which together helped to push crude oil to its highest level in years, the price of oil has cooled considerably, dipping below $60 per barrel in October.
When oil touched $80 per barrel in July, many analysts — citing the historic correlation between oil and gold — predicted the yellow metal would rocket past the $800 threshold before summer's end.
In retrospect, it's clear that these analysts either overlooked or grossly miscalculated the longer-term supply-and-demand fundamentals of the oil market. Currently, crude oil is trading consistently in the $59 - $63 range and analysts say that events this past month strongly suggest stability at these price levels for the near term.
So what does this all mean for gold?
Testing the Gold/Oil Ratio Hypothesis
Do falling oil prices inevitably hurt gold? Over the years, some market commentators have taken the firm position that gold always follows oil in lockstep. Cherry-picking a handful of dates from the past few decades, they conveniently point to charts that depict gold and oil spiraling upward and downward in perfect synchronicity. The most dramatic of these is a graph comparing gold and oil prices in 1980, when gold soared to $885 in the shadow of record crude prices.
While this historic example is certainly noteworthy, it is counterbalanced by other examples suggesting that world market prices for gold and oil — while definitely linked — are much more independent than the gold/oil ratio model allows.
Some experts, for example, have asserted that the recent decoupling of gold and oil prices is proof that the gold/oil ratio is too limiting and far too simplistic to reflect the complexities of the market.
Oil Is One of Many Gold Price Drivers
While the price of oil languishes near $60 per barrel, gold is back up over $600 and touching its highest level in a month. Could it be that oil is set to skyrocket and the rising gold price is merely a leading indicator of that upward shift? Even proponents of the gold/silver ratio hypothesis claim that gold follows oil and not the other way around.
Those analysts who tend towards a macro view of markets assert that oil is one of many factors influencing the price of gold. The other factors they cite include interest rates, the dollar's performance, inflation, and political developments throughout the world. Contrary to their counterparts who see evidence of an absolute causation between swings in gold and oil, these experts reject the notion that gold (or any other commodity) is linked specifically to any other commodity.
In fact, strict adherents to the gold/oil ratio hypothesis would be hard-pressed to explain gold's rise over the past several weeks. Despite the October 16 announcement by OPEC that it is preparing to curb supply by as much as 1.2 million barrels per day, oil prices have remained at a 10-month low.
Meanwhile gold has already gained back much of the ground it lost during the first week of October, parting ways with oil as early as October 7. And with steady physical demand for gold in emerging markets like India and China, the inherent uncertainty accompanying the election season in the U.S., the dubious future of America's housing market, and a month of increased violence and bloodshed in Iraq, many "big picture" market watchers aren't surprised by gold's strong performance.
Most experts agree that the price of oil won't retain long-term stability near $60 per barrel, and, furthermore, that the oil market may be overdue for a correction. But one thing remains clear — while gold and oil share close ties, they aren't joined at the hip.
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| Jim Puplava |
A Friendly Referral
We at Northwest Territorial Mint offer investors a chance to take physical ownership of precious metals through bullion coins and bars. But we frequently receive inquiries about other ways to invest in these commodities, such as via ETFs, mutual funds, stocks, or futures contracts. Though it's not our business model to provide these investment options to our clients, we do have a professional contact, James J. Puplava, who offers managed precious metals stock accounts through his registered broker/dealer Puplava Securities, Inc. (member NASD/SIPC), a subsidiary of Puplava Financial Services, Inc. We've always been able to rely on this highly-regarded company for solid information, helpful advice, and excellent customer service. Their staff is knowledgeable and friendly, and always abreast of the latest market news and trends, providing superb asset management services to all their clients. In addition to offering a full range of investment options, Mr. Puplava's trio of companies, under the umbrella of PFS Group, also offers educational information about investing at www.financialsense.com, and free weekly webcast of market commentary and interviews with top financial experts at www.netcastdaily.com. If you're looking to explore precious metal investment options in addition to physical ownership of bullion, I encourage you to give Jim a call. His offices may be reached at (888) 486-3939 or (858) 487-3939 from 8:00 am to 4:00 pm (Pacific Time) or via the Internet at www.puplava.com.
Ross B. Hansen
CEO, Northwest Territorial Mint
Disclaimer
A market maker in gold, silver, platinum, and palladium bullion products, Northwest Territorial Mint is not registered with the National Association of Securities Dealers or the Commodity Futures Trading Commission. Northwest Territorial Mint receives no remuneration for providing PFS Group's information to its clients. Furthermore, Northwest Territorial Mint makes no assertions about the quality of the investment advice or services provided by the PFS Group. Clients are encouraged to perform their own research and due diligence prior to making any investment.
Ross Hansen is the founder and CEO of Northwest Territorial Mint and has more than 30 years of experience as a precious metals trader and broker.
Factors Affecting Gold and Silver
by Mark Burgess
In last month's article, I explained that the gold/silver ratio — the quantity of silver (in Troy ounces) needed to buy a single ounce of gold — is a reflection of the ever-changing relationship of these two precious metals. Furthermore, I supplied an example to illustrate how the gold/silver ratio could be leveraged to realize investment returns without relinquishing physical possession of these metals.
The primary goal of this article is to present the four major aspects of gold and silver — physical, industrial, monetary, and market — in an attempt to broaden your understanding of how the gold/silver ratio works and how to incorporate this knowledge into your overall precious metals investment strategy. In addition, I will describe the connection between the aspects of gold and silver mentioned above and the ever-evolving nature of the gold/silver ratio over the past several hundred years.
Physical Aspects
Gold and silver are similar in that they are both metals. All other characteristics are different. Their color is the first visual distinction. Their electro-chemical properties, though close, are sufficiently separated in their response to various chemical combinations. Gold must be heated to 1,945 degrees Fahrenheit to melt. Silver does so at 1,761 degrees Fahrenheit. Gold is almost twice as dense as silver. Gold and silver also vary in their chemical interactions, a factor exploited by industry.
Industrial Aspects
Based upon their electro-chemical properties, both metals have commercial and decorative applications. With the exception of the photographic field, silver’s use in industrial/manufacturing processes is a one-way street of consumption. Silver is not as economically viable to recycle as gold. Ninety-five percent of all the gold ever mined in history, in some form, is still available. This contrasts sharply with silver, whose consumption throughout the industrial revolution (1720 to today) has increased geometrically, to the point that the ten billion ounces of silver held in the U.S. Government stockpiles at the end of World War II have disappeared into industry. Current estimated annual silver mine production is 600 million ounces, while estimated annual industrial silver consumption is 800 million ounces.
Monetary Aspects
Historically, both metals have primarily been used as money (gold for large-value purchases and high-density wealth savings, silver for small-value purchases and savings). Generally, silver (the poor man’s gold) has borne the bulk of the burden as the medium of exchange. After gold and silver were demonetized (mostly in the early 20th century), governments liquidated their stockpiles. This kept the price of precious metals for currency artificially low. It also provided an incentive for industrial consumers to use the relatively cheap metal. And it provides savvy investors with an excellent multi-decade opportunity to accumulate these metals as "real" monetary savings.
Market Aspects
The silver market is considerably smaller, in dollar terms, than the gold market. This means that more dollars are represented in the gold market. As a consequence, fewer dollars will move the price of silver (up or down) than gold.
With these four aspects determined, let us now look at the three gold/silver ratios that exert a powerful influence: 1) the natural, 2) the monetary, and 3) the industrial.
The Natural Ratio
Some estimates say that the amount of silver in the earth is about ten times the amount of gold. If these estimates are correct, and there were no other aspects to consider, then this natural ratio of 10 would dominate the market.
The Monetary Ratio
Prior to the 20th Century, the major utilization of precious metals was for use as money. During the previous centuries the monetary ratio varied between 15 and 30.
The Industrial Ratio
In the fiat-money era, precious metals are viewed as commodities. Comparing the effort, energy, and expense to find, extract, and refine an ounce of gold to that required to produce an ounce of silver is called the industrial ratio. Making an ounce of gold costs 60 times more than making an ounce of silver, and so the industrial ratio is 60.
A look at the 300-year gold/silver ratio chart below reveals the shift from the dominance of the monetary ratio (over the natural ratio) to that of the industrial ratio. In the last century, the highest ratio has been 133 (1933), and the lowest, 14 (1964). Practically speaking, when the gold/silver ratio is 60 and higher, the industrial users are in control of the market price. When the ratio approaches 40 or below, the monetary users (investors, savers, speculators) are contending for control. Where will the ratio head in the coming months? It's impossible to say for sure. But regardless of the direction it takes, you now have the advantage of knowing what these shifts mean and how to make them work for you.
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Coinage Act of 1792 Passed |
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Civil War Ends |
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U.S. Government Gold Recall |
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U.S. Mint Ceases Silver Coinage |
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First Silver ETF Introduced |
Mark Burgess has been an active trader of precious metals for over 30 years.
Precious Metals Worldwide
News & Trends from Around the Globe
Pan American Silver Corp. Opens New Mine
Pan American Silver Corp announced the opening of its newest operation, the Alamo-Dorado Mine, located in the Mexican state of Sonora. Construction was completed in October and ore is currently being processed at the site. Company officials expect the mine to produce approximately 5 million ounces of silver and 12,000 ounces of gold annually.
Gold's Gains Pad Q3 Profits for Newmont
Newmont Mining Corp. (NEM) reported third-quarter net earnings of $198 million, an increase of 57% over last year. The Denver-based company, the world's largest gold producer, cited its ability to leverage a consistently strong gold price throughout the third quarter as the primary cause for the considerable earnings increase.
Palladium Case Protects iPods
In a demonstration of the seemingly ceaseless versatility of palladium (found in everything from dental devices to DVD players), the Italian company Orbino announces its latest product – a hand-stitched leather case with a scroll-wheel frame finished in palladium. The use of palladium – known for its durability – is designed to protect the iPod from scratching.