Gold Fields Minerals Services (GFMS), the London-based metals consultancy, says that the sale of scrap gold in India and the Middle East this year is down compared with prior years. India and the Middle East are “price-sensitive” regions where gold sales usually increase with gold price increases.

However, this year the average quarterly volume of gold sold in India is running less than 20 tons. In 2003 when the price of gold averaged $364, scrap sales ran at about 30 tons a quarter.

GFMS analysts explain the aberration this way: “The most simple explanation appears to be that, as expectations of higher (and ever higher) prices have taken hold, consumers have reduced the amount of old jewellery they are willing to sell back.”

In the industrialized countries this year, scrap gold sales increased with higher prices; however, sales have not kept pace with prior years’ sales. GFMS says that is because of “less of a clear-out from the trade than there was last year,” which means that commercial end users are holding on to their scrap gold.

Supposedly, the jewelry industry, the major consumer of gold, is the best prognosticator of gold prices. So, reduced sales scrap gold sales may suggest higher gold prices.

In my last post, I noted that Jessica Cross, CEO of Virtual Metals, had forecasted $900 gold in 2008. Now, Citigroup (Citibank) sees the possibility of $1,000 gold if the US economy goes recessionary. If we do see a recession, Citigroup ranks gold as the best likely performer, followed by copper, aluminum and zinc, with steel being the worst.

Citigroup observed that “. . . gold is oscillating around $800/oz as speculators have locked in profits. We view the outlook favorable for a test of $1,000.”

The Citigroup analysts see precious metals “as well-positioned” because the Fed and other central banks have made it clear that re-inflation is the operative for the times. Concerns about subprime debt have created what the money men call a “liquidity crisis.” Central bankers always attack liquidity crises by printing more money, which adds to inflationary pressures and makes precious metals more attractive to investors.

Meanwhile, Citigroup analysts warn that “. . . the IMF is taking measures (e.g., job cuts) aimed at convincing the U.S. and Europe to allow 400 tons of gold sales.” If the IMF, which has made rumblings about selling gold for some time, is successful in getting the US to approve gold sales we can expect years of turmoil in the gold market.

However, new comers to the gold market need to know that the IMF and the US were big sellers of gold in the early 1970s when gold had not topped even $200 and silver traded below $2.00. Sales of gold by “official” agencies do not necessarily result in lower gold prices over the long run. However, the short run can be hectic.

What we have to keep in mind is that we are living in highly inflationary times, and that gold and silver have proven to be smart investments during inflationary times.

Resourceinvestor.com has posted an interview with Jessica Cross, CEO of Virtual Metals, who says “we’re going to be very surprised if we don’t see $900 an ounce in 2008.” Obviously, $900 gold within twelve months would be another major move. If we do see $900 in 2008, then we have to be ready to accept, sometime, maybe in 2009, a period of consolidation. Still, geopolitical circumstances and concerns about the dollar are such that no one can say when buyers will take a breather.

A couple of more interesting points about the interview are in order. First, many U.S. investors may not be familiar with Virtual Metals, but resouceinvestor.com says that Virtual Metals, based in the UK, is “. . . probably the world’s most respected precious metals . . . agency.” So, Cross’ observations should be of interest to gold and silver investors.

Second, Cross says that surge of recyclable metals that usually comes with a sharp price increase is not happening this time. Recyclable metals are a major source of gold for refineries, but gold is not coming in as expected, which means less gold coming out of the refineries.

Third, Cross says this about silver: “. . . silver will sort of be somnolent for a while, and then suddenly it kind of erupts into life, and the percentage price moves then make everybody’s jaw drop. It can happen, there’s no doubt.” At CMIGS, we are not concerned about silver’s failure to keep step with gold.

When silver makes its move, it will do so in a dramatic manner, such as the late 2005 through May 2006 when silver tacked on a 75% gain in about seven months. We continue to think that silver will outpace gold before this precious metals bull market is over.

Finally, Cross points out that the Fed is usually accommodating during election years, which means lower interest rates and increased “liquidity,” via the Fed’s printing presses, which is inflationary.

It’s the right climate to own gold and silver.

The most often given reason for buying gold and silver by new investors is concern about the dollar. And, rightfully so. The dollar is in a precipitous decline in the foreign exchange markets, brought on by decades of deficit spending by our federal government.

The fedgov’s deficit spending really got started after President Nixon “closed the gold window” August 15, 1971, which meant that foreign governments could no longer turn in paper dollars and receive gold. Nixon effectively put the world on a monetary system based on paper.

Actually, Nixon “dropped the second shoe.” President Franklin Roosevelt put us on the road to a paper currency when he made it illegal for Americans to own gold coins and gold bullion. Regardless of how we got to this point, we are there, and we must deal with it: a worldwide monetary system based on paper, a useful but an inexpensive commodity.

The sad history of paper money is that when it is unlinked from gold or silver politicians print it until it is worthless. As the late Franz Pick, noted currency expert, said when Nixon closed the gold window, “The dollar is a dead currency. It is only a matter of time.” Now, it appears that the news is spreading about the dollar’s ill health.

Earlier today, CNN.com posted an Associated Press article about debt in America. It is a scary read. A ticking time bomb, the author says. The article reinforces why gold and silver are “the investments” for the times. Actually, they are hedges against a declining dollar, brought on by decades of deficit spending.

For those readers who want a really good piece on money and the dollar, read The End of Dollar Hegemony, a statement by GOP presidential candidate Ron Paul before the House of Representatives. Paul’s piece is one of the best I’ve read, showing that we have at least one presidential hopeful who understands money and the predicament our country is in.