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July 03, 2005

Gold, Silver & 1.3 Billion Chinese
by Joshua Fritsch

Photograph courtesy of Panda America
http://www.pandaamerica.com/

What you are looking at is a photograph of one of the rarest modern gold coins in the world. This coin routinely sells for almost triple its bullion value, and I believe that before the sun sets on the current bull market in gold that ratio itself could double. Do I have your attention? Good.

Welcome to the world of gold Pandas - - a promising and exciting slice of the precious metals market that not very many people are aware of...yet. The Gold Panda series has been produced by China since 1982, with Silver Pandas following in 1983. All of the early years in both Panda series command a hefty premium - - and with good reason; they didn't make very many of them. From the very beginning, China made these coins for the collector. The proof-like mirror surface and the 24k purity make for a beautiful coin, and the extreme rarity of some of these pieces make them very attractive to collectors and investors alike. Learning more about these coins is certainly worth your time! But before we dive into the Pandas, let's set up some background.

Many bullion investors are familiar with the American Eagle series (both gold and silver) so that seems a good place to start. Two coins in particular stand out in terms of rarity - - the 1991 half-ounce gold Eagle, and the 1995-W one ounce silver proof Eagle. These two coins command the largest premiums of the series due to their extremely low mintage. Only 24,100 half-ounce gold eagles were minted in 1991 - - the lowest of the entire gold Eagle bullion series. Containing roughly $215 worth of gold, these coins routinely sell for $600+ - - even more if they've been slabbed with a good grade. The 1995-W silver Eagle is even more impressive. Being a proof coin (and for some other reasons that I won't dive into here) it attracts more attention from wealthy investors than any of the bullion series, which turns $7 worth of silver into a much sought-after commodity selling for over $2,000! Only 30,125 of them were made, and the U.S. Mint isn't making any more.

I think we can all agree that rarity is a key factor in determining the value of a coin - - but just how rare are the Pandas? The coin pictured above, a 1982 half-ounce gold Panda, boasts a mintage of only 13,339! It doesn't stop there - - only 15,971 one ounce gold Pandas were made in 1982. The quarter ounce version comes in at a lean 40,111 and the tenth-ounce stays under the 100k mark with a mintage of 75,100. The silver Pandas take the rarity play even further with only 10,000 minted in their 1983 debut.

It's not just rarity that makes these coins a spectacular investment. Let's back up in time for a moment - - specifically, let's take a look at America in the 1970's. That was a special time period for commodity investors - - the 70's saw massive moves in oil, silver and gold (and a plethora of other items). You'd be hard pressed to find a gold bull today that doesn't dream of a repeat of the 70's gold run. Why was there such a huge move in gold? The common answer is "Inflation, duh." - - but I think it was more than that. You see, aside from the runaway inflation in the heyday of disco, two other extremely important events occurred. The first was the final decoupling of the Dollar from the gold standard in 1971 - - we "floated" the U.S. Dollar against all other currencies. The second was the legalization of ownership of gold by U.S. citizens in 1975 - - for the first time in almost half a century, Joe America was permitted to own gold. This knock-out combination of inflation, currency "floating" and private ownership put the booster rockets on gold and sent it soaring from $35/ounce to over $850/ounce. There are some very interesting parallels today. First, let's talk about inflation.

Regardless of what the government tells us about "tame" inflation, you can't argue with the prices at the gas pump, or the cost of milk, or the fact that your paycheck doesn't seem to stretch quite as far as it did just a few years ago. The Inflation Monster (IM) is back and it has only two goals:

1) Kick consumer butt
2) Chew bubble gum

Unfortunately for us consumers, the IM is all out of bubble gum. While the debate rages over inflation and deflation, and the Fed is busy placating the masses with their "measured pace" on interest rate hikes, the average American is getting crushed by rising prices, rising debt and rising interest rates! With the Dollar precariously perched on the edge of a hyperinflationary cliff we are faced with the possibility of an Inflationary Depression. Typically when someone thinks of a depression they associate it with deflation where "cash is king". But what if the "cash" is worthless? Would the world then turn to the ultimate cash, which happens to be gold? Is it possible we would see a severe depression along with a falling dollar, thus taking away jobs while prices (in USD) increase? This is an ugly scenario to say the least.

The second aspect of the 70's parallel is private ownership. In October of 2002, China authorized private ownership of gold for the first time in 50 years. Sound familiar? The difference here is the fact that China has a population of 1.3 billion whereas the U.S. had a population of just over 200 million in 1975. Do you see the potential here? Let's say 2% of Americans caught gold fever in the 70's - - that's demand from roughly 4 million people. Now, assume that 2% of Chinese citizens want to get in on the current gold bull - - that's twenty-six million! If each of them purchased just a single ounce of gold, that's 737 metric tons. According to the World Gold Council, 2,604 metric tons were mined in 2001 - - which makes our hypothetical Chinese demand 28% of a year's worth of production. Considering demand from Chinese citizens was at zero for the last half of a century, that's pretty impressive! Now, consider that 1% of that 2% are investors who want to purchase gold Pandas - we're down to 260,000. Now, let's say 5% of those 260,000 people actually have the money to spend on the rarest of the series - we're down to 13,000 potential buyers. There's only one problem - - the Chinese mint only made 13,000 of the rarest gold Pandas, and only 10,000 of the rarest silver Pandas. How many of these coins have been lost or damaged over the years? Are we down to 8,000 existing coins? 5,000? 2,000? As you can see, there is a potentially explosive supply/demand problem here.

Finally, we get to the third ingredient for our comparison, and that is the "floating" of the Yuan. Unless you've been living in a cave, you've heard rumblings that the U.S. is pressuring China to decouple the Yuan from the Dollar and let it float against all other currencies. Granted, the Yuan is not the world's Reserve Currency as the Dollar was and is, but it is a significant parallel nonetheless. Truth be told, no one knows exactly what will happen should China remove their currency peg. What we do know is that whatever happens, it will not be a minor event. Gold loves major turbulence - - and I for one think we are in for a very bumpy ride if and when China takes action on the Yuan.

When we pull all of this information together (gold, rarity, population, legalization, inflation and fiscal turbulence) we have a potent brew of prime investment opportunity. A balanced portfolio requires more than an online brokerage account, and Pandas are an excellent addition to anyone's nest egg.

I hope you have found this information interesting and useful. I have been collecting Pandas for a while now, and it is a refreshing and rewarding change from playing the PM stocks. Not to mention the fact that when you hold bullion, you have ownership of a tangible "thing". Stocks come and stocks go, but gold is here to stay.

Information on where and how to buy Pandas, as well as further analysis of which coins are most likely to provide the best returns is available to subscribers. Please visit http://www.themarkettraders.com/ for more info or you can contact me directly at joshua@themarkettraders.com.

***Earlier readers of this article may have noticed some "fuzzy math" stating that 1% of 1.3 billion was 26 million. This is what I get for switching from 2 to 1 % and not properly re-reading my work. Thus, I am the "one fool"! Many thanks to Earl Benson for having a sharp eye!

Joshua Fritsch
TheMarketTraders.com

Disclaimer: The information contained in this article is believed to be factual, however, the author cannot be held responsible for mistakes or intentional deceptions on the part of the sources. Trading and investing of any type entails risk, and that risk is assumed solely by the trader/investor.

Copyright © 2005 Joshua Fritsch

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