Market Summary —
February 2011
The month of February was mixed for precious metals. The ongoing political unrest sweeping across the Middle East continued to reaffirm the role of precious metals as safe-haven assets in times of crisis and uncertainty. Gold and silver both showed strong gains after slight pullbacks in January, while platinum and palladium remained steady.
Gold opened the month of February at $1,339.20 per ounce, finishing at $1,414.57. For the month, gold reached a high of $1,419.25 per ounce, and a low of $1,326.30.
Silver prices in February opened at $28.25 per ounce, and closed at $34.03 per ounce. Silver hit a 30-year high of $34.35 per ounce, and a low of $27.91 per ounce. Silver spent most of February on an upward trajectory.
Platinum began the month of February trading at $1,806.00 per ounce, then finished strong at $1,809.50. Platinum reached a two-year high during February, topping at $1,872.00 per ounce, with a low of $1,774.00.
Palladium remained steady, opening the month of February trading at $824.75 per ounce, finishing slightly down at $800.50. Volatility marked palladium’s February, as it reached a high of $864.50 per ounce, falling to a low of $762.75 per ounce.
The February gold/silver ratio—the quantity of silver (in Troy ounces) that one ounce of gold will purchase—finished at 41.56 for the month of February (versus 47.39 at the end of January and 45.97 at the end of December). The declining gold/silver ratio is reflective of the massively increasing value of silver relative to gold. To illustrate just how dramatic silver's gain is relative to gold, a year ago the silver/gold ratio was 70.63 on February 8; two years ago, 71.52 at the end of February; and in the fourth quarter of 2008, it was above 80 on seventeen occasions.
| Feb Spot Price Summary (U.S. Dollars) | ||||
| Silver | Gold | Palladium | Platinum | |
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| High | $34.35 | $1419.25 | $864.50 | $1872.00 |
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| Low | $27.91 | $1326.30 | $762.75 | $1774.00 |
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| Open | $28.25 | $1339.20 | $824.75 | $1806.00 |
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| Close | $34.03 | $1414.57 | $800.50 | $1809.50 |
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CONTENTS
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.
CORRECTION
We know that krugerrands are from South Africa, not South America. Thank you to the alert readers who caught the error, and apologies to the rest for making it. We presume those of you who didn't catch it read it as "South African" just as our proofreader did.
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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 February, 2011. Source: Northwest Territorial Mint spot prices as posted at bullion.nwtmint.com.
The following charts display the daily spot price range of each metal for the six months ending February 2011.
Party Like It's 1980 Again!
by Ross Hansen
Silver already trading above $35 an ounce in the first quarter of 2011! Gold printing all-time highs above $1,400! And of course, the share price for many of the better mining producer stocks is on fire these days as well too. Who would have guessed?
When we look at the world right now, there seems to be an uncanny resemblance to what was going on during another silver bull market from the distant past that I vividly remember. I am referring to the precious metals run-up during the 1970s, culminating in the spring of 1980 when silver briefly exploding to over $50 an ounce... then plummeting to less than one-tenth of that price in a grinding downward movement over the next two decades.
Are there similarities with what’s happening today – around the globe in general, and with the price of silver in particular?
Well, let’s see. In 1980, the United States had a liberal president at the helm, was enduring high unemployment, running a huge deficit, and faced the specter of rising inflation. Fast forward to 2011, and voila! – a lot of these same elements are currently in play, no?
Looking at the Middle East, we are witnessing widespread social and political instability, giving speculators the opportunity to push oil prices above $100 per barrel (with predictions of $200 - $300 on the way!), resulting in several-times-a-week price jumps at the gasoline pump. Was that going on in 1980 too? You bet.
Today, the US dollar, valued in relation to a basket of currencies, is acting like a basket case itself as it threatens to make new lows. In 1980, the Swiss franc was making the greenback look rather anemic then, as well.
Were we being “challenged” by another country, which pundits said would soon overtake our economy and leave it in the dust? Sure were. Then it was Japan. Today it’s China.
And of course, silver (and the silver bugs) have not been resting on their laurels. From a price of around $18 an ounce just last year, the “restless metal” (as David Morgan and others refer to it) has, as of this writing, jumped above $35 the ounce. We’re hearing predictions that prices are destined to climb into triple digits even before today’s elementary school-aged children have graduated into middle school. Well, in 1980, silver had gone vertical to a then-unheard-of price around $50 – with pundits at the time calling for $100 per ounce, saying that it was “in the cards.”
Of course there’s also some talk nowadays about “conspiracies” – with moneyed interests seeking to hold prices down, while other players hoard the white metal in order to force its price skyward.
Although it sure is difficult to predict the future before it gets here, an events watcher like me can be excused for thinking that it could be helpful to remember what took place years ago – when many of the same elements we are reading about right now were then in play, too.
Reflecting on this past, might enable us to keep our balance as we try and figure out what’s going to take place down the line.
It also helps to remember that two of the biggest drivers of human nature – greed and fear – always seem to be lurking in the shadows, waiting for the right moment to step onstage and play their part in shaping events as well.
Far be it from me to predict just where all of this is going to lead, and where silver’s price is likely to end up. But it’s more than likely that we’re going to be in for one heck of a ride – up, down, and maybe up again, too.
Ross B. Hansen
CEO, Northwest Territorial Mint
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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. Listen for Ross on Real People Radio on April 6 starting at 8:00 pm Eastern Time (5:00 PM Pacific).
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The Tax Implications of Investing in Precious Metals
by Joe Bilsborough, Director at Northwest Territorial Mint
Have you ever noticed that when you put the words “THE” and “IRS” together, it spells “THEIRS”?
— Old Accountants’ Joke
The benefits of investing in precious metals are numerous, including portfolio diversification, their performance during times of inflation, their historical inverse relationship to the US dollar, liquidity, and more. But there comes a time when we may want to sell our precious metals and the IRS will want some of the gain in the form of taxes.
According to the Internal Revenue Code, gold, silver, platinum, and palladium are “collectibles” when held in the form of coins or bullion. A collectible includes items such as stamps, coins, fine wines, precious metals and gems, antiques, and fine art. As a result, the tax treatment of capital gains and losses from the sale of precious metals is different from that of investments in stocks and mutual funds.
First, let’s define what a capital gain is. A capital gain is the difference between what you paid for an investment and what you received when you sold that investment. If you made a profit on the investment, you have a capital gain. If you lost money on the investment, you have a capital loss.
Second, it is important to understand the difference between short-term gains and long-term gains because they are taxed differently. Short-term gains are realized if the investment is held for one year or less; long-term gains are realized if the investment is held for more than one year. The holding period is determined from the date you bought your investment until the date you sold your investment.
Now, let’s look at the tax rates. For 2010 tax returns, short-term capital gains on the sale of precious metals are taxed at your ordinary income tax rate -- 10, 15, 25, 28, 33, or 35 percent. This is similar to the way short-term gains are taxed on stocks and mutual funds. However, long-term capital gains are taxed at a flat 28%.
Which is better – long-term or short-term? Well, it really depends on your individual tax situation. If you are in a tax bracket that is higher than 28%, then long-term gains may be better. If you are in a lower tax bracket, then the opposite may be true.
What happens if I sell my precious metals at a loss? The silver lining is that, if your capital losses are more than your capital gains, you can claim a capital loss deduction. You can use your total net loss to reduce your income dollar for dollar, up to $3,000 -- or you can carry over any unused parts and treat it as if you had incurred it in the following year. If part of the loss is still unused after that, you can carry it over to later years until it is completely used up.
Where do I report my gains or losses? Once you calculate your gains or losses on each investment transaction, you report those on Form 1040, Schedule D. Gains and losses are reported for each transaction and once all of them are figured, you will either have a net loss or net gain from all of your trades.
Remember that taxes are just one element of investing in precious metals (or any investment). Many people spend a lot of time trying to figure out when to sell solely from a tax perspective. Be sure you look at the bigger picture and ask yourself, “How do precious metals fit into my overall investment portfolio? What are my investment objectives? What is my tolerance for risk? And what is my outlook on the asset class?”
Also, be sure you get advice from your financial advisor and/or tax advisor, as the information discussed in this article just scratches the surface on the topic. There is often new tax legislation on the table and something new occurring in the US economy and global investment climate. And keep in mind, many precious metal products can be held in a traditional or Roth IRA, which can often help lower an investor’s tax bill!
...
Joe Bilsborough, AAMS, is Director of Northwest Territorial Mint’s Institutional Division and has worked in the Financial Services industry for more than 20 years as a Financial Advisor, Principal, and Head of Distribution.
Northwest Territorial Mint does not advise on any personal income tax requirements or issues. Material discussed in this article is meant to provide general information only and does not represent personal tax advice, either express or implied.
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Precious Metals' Volatility Causes Gold and Silver Margins to Rise
by Northwest Territorial Mint Staff
A few years ago, the price of gold, silver and other commodities did not change much from day to day. Or even from week to week. However, 10 years into the current bull market in the precious metals, this has begun to change. Whereas at one time, a $10 rise (or fall) in gold was a good-sized move, and in silver 20 cents, that was then and this is now.
Nowadays, a $25 one-day price move in gold, and a change in silver of over $1 an ounce are becoming more frequent. Some precious metals analysts like David Morgan of The Morgan Report and Greg McCoach of Mining Speculator, have written that in the not-too-distant future, we may see $100 intraday moves in gold and $4 - $5 daily changes in silver.
The swings in price of a publicly traded item - be it stocks, or commodities like sugar, wheat and cotton or precious metals, are referred to as volatility. When investors and traders buy and sell these items on margin – borrowing (leveraging) some of the cost from their broker or bank – the volatility is magnified. In the case of futures traders – who may control a contract worth 10 to 20 times the actual number of dollars invested "leverage," volatility can make their profits – or losses go through the roof.
In late February, CME Group, the owner and operator of the New York Mercantile Exchange and Commodity Exchange (COMEX), announced a 50% increase in the initial and maintenance margin requirements on gold and silver futures contracts. Maintenance margin is the amount of money a futures trader must keep in account in order to cover a certain percentage of his/her position, regardless of price swings up or down.
Over the last year, COMEX margins have been increased several times in order to limit speculation in the precious metals. Writing at GoldAlert, "jturbin" comments:
While these decisions have often led to short-time sell-offs in gold and silver, history has shown that these measures have little to no effect over the longer-term. If the CME and federal policymakers are trying to suppress the price of gold and silver, they would be much better served urging Federal Reserve Chairman Ben Bernanke to end his reckless quantitative easing programs instead."
On the day that CME Group announced (after the close) the margin increase, silver rose above $32 per ounce for the first time since 1980, setting another in a series of 30-year highs in the process. In February alone, silver surged more than 20%, with the white metal up almost 4% year to date.
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Precious Metals Worldwide
News & Trends from Around the Globe
China 2011 - Year of the "Golden" Rabbit?
Gold demand in China continues through the first quarter of 2011 at a robust pace. For several years, Beijing has encouraged its citizens to accumulate both gold and silver. Reuters reports that the Industrial and Commercial Bank of China (ICBC), the world’s largest bank in terms of market value, sold fully one-half of the gold bullion in January of this year that it did in all of 2010.
Zhou Ming, deputy head of precious metals, commented, "China has a centuries-long cultural attraction to gold and because we have started at such a low base, I think demand growth will likely stay strong for quite some time... We are seeing explosive demand for gold. As Chinese get wealthy, they look to diversify their investments and gold stands out as a good hedge against inflation.”
In addition to very strong demand from buyers, China has now become the world’s largest gold producer as well.
Gold and Silver Once Again
Legal Tender in the US?
On Friday March 4, the Utah House of Representatives voted 47-26 in favor of a bill recognizing gold and silver coins issued by the federal government as legal currency. By the time you read this report, the state Senate may also have voted on this issue. Similar bills have been introduced in 13 states: Colorado, Georgia, Montana, Missouri, Indiana, Iowa, New Hampshire, Oklahoma, South Carolina, Tennessee, Vermont and Washington. Utah’s bill does not require replacement of current federal paper currency.
The bill would also exempt the sale of gold from Utah capital gains tax, and proposes the study of alternative currencies. The U.S. ended its use of the gold standard in 1933, when private ownership of gold was outlawed by executive order of President Franklin D. Roosevelt. Citizens were forced to sell their gold back to the federal government, which then revalued the price upward from $20.67 to $35.00.
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Letters
What our readers have to say
Dear Ross,
I've been wondering about the effect of ETFs on the price of gold and silver. So I found this month's article that you wrote very interesting. My speculations could be wrong, however my thoughts have been just the opposite of yours. Now I'm wondering if maybe you know something that I don't?
My understanding is that the ETFs do not actually hold the amount of gold or silver metal that the fund has in cash invested. Maybe I'm wrong about that. There are numerous writers who caution about owning those funds simply because they do not have the metal to back up the fund. They caution that the funds are simply an index – tied to the spot price of the metal, with a percentage of the real physical metal to back up the fund. (It seems to me that I heard as low as 10% one time? Truly not sure about that!)
Assuming that this information is true, that a small percentage is what backs up the ETFs, my speculations were that the ETFs were a smart move (government or stock market?) to actually suppress the price of physical metals. And that an unsuspecting public would be damaged by yet one more pyramid scheme.
Do you know? Do you know for a fact that the funds do actually purchase in a direct one to one ratio - the gold and silver to back up the fund? That the metal is actually taken off the market?
I'm also wondering if you have statistics or industry numbers about what the actual production of gold and silver from mines is worldwide? You and I spoke on the phone one time about two years ago (you took my order for some coins when your staff was swamped) and at that time you said "there is plenty of silver in the world we will not run out." Do you still think that is the case today?
Thanks - just curious about your opinions. I figure you know more, being in the industry, than most of us!
Jeanette Haas
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Jeanette,
Thank you for responding to the comments I made in the February issue of Precious Metals Monthly. It’s apparent that you’ve done some serious thinking about this topic!
There is a lot of commentary on the Web about ETFs, and like anything else, some of it is bound to be misinformed. But that’s only half the story. The reality is that these sector funds have not yet traded through a whole investment cycle, yet they have become a huge marketing tool, even as people still have questions. Will they perform as expected when the underlying stock or commodity moves up and down?
In other words, do they accurately track the underlying item? Will the market makers step in to provide liquidity for buyers and sellers when prices go sky high, or drop through the floor? Will the custodians of ETFs carry out their presumed fiduciary responsibilities to the customer (shareholder)?
And, in the case of a gold or silver ETF, as you note, is all of the metal which supposedly backs a given fund actually in a warehouse someplace with that fund’s name on it? Chances are that most, if not all of it is actually there – maybe not 100% of it, on a daily basis, due to the logistics of moving around a lot of metal, but my sense is that the concerns people have about this are much ado about little.
Still the newness of ETFs as an investment (I prefer the term “speculative”) tool, means that we are faced with issues of transparency, competency and performance that cannot be answered with total assurance at the present time.
Before they place their money on the table, anyone who wishes to get involved with an ETF should be willing to spend some serious study time, as well as decide what they hope to accomplish. In short, “What’s my goal?” and “How can I best accomplish it?” As a friend of mine likes to say, “Education before acquisition.”
To me, owning a silver or gold ETF is several steps removed from the relatively straightforward process of simply buying the physical metal from a reputable dealer (I can recommend one!).
As to your final question about whether or not there is enough silver out there for buyers, let me stand by what I told you earlier, when I said, “Yes, there is and always will be plenty of silver in the world – we are not going to run out.” In fact, according to precious metals consultancy GFMS, gold supply rose 2.7% in 2010, to about 2,652 metric tons. And the Silver Institute’s latest published figures report silver mine production rose by 4% to 709.6 million ounces in 2009.
For silver, just like any other item that people might want to acquire, the only real question is, “at what price?” Neither I nor anyone else can predict where a precious metal may trade in the future, but I am quite certain that the market will let us know on a daily, hourly, or even minute-to-minute basis, just what the price for buyers and sellers alike is going to be.
Ross B. Hansen
CEO, Northwest Territorial Mint
...
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. Listen for Ross on Real People Radio on April 6 starting at 8:00 pm Eastern Time (5:00 PM Pacific).
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Contents © 2011 Northwest Territorial Mint.
Information provided here should not be considered as advice or as an offer or enticement to buy, sell or trade. The contents of this publication, including any opinions and analysis, are strictly intended for educational use. Opinions expressed in bylined articles are those of the individual author and do not necessarily reflect the views of Northwest Territorial Mint. Furthermore, information obtained from all quoted sources is believed to be reliable and is offered in good faith. Northwest Territorial Mint does not accept responsibility for any trading losses incurred from reliance upon this information. Readers are encouraged to consult with a financial advisor before making major investment decisions.
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