Last week premiums on Silver Eagles jumped as word spread that the U.S. Mint had run out and would ship no more this year. However, at the start of this week, the Mint revealed that it would produce more Silver Eagles before year-end.

The Mint gave no indication of how many Silver Eagles will be turned out, but because premiums fell back to normal levels it appears that the wholesalers think sufficient quantities will be minted to meet demand over the next few weeks.

Rumors spread around the Internet that the shortage of Silver Eagles was because of a shortage of silver. That was not the case. The Mint routinely shuts down production in November to begin production of the next year’s coins so that they can be shipped in early January, usually the first week.

This time, however, the shutdown came with fairly strong demand, and dealer inventories were depleted rapidly. That the Mint would reopen production shows that it has some sensitivity to the marketplace.

Silver Eagles are the best selling government 1-oz silver pieces in the country. So, why give the Royal Canadian Mint a chance to fill the void with its 1-oz Silver Maple Leafs?

As noted in the November 23rd post, last week the Mint reopened production of its 1-oz Gold Eagles when dealers’ inventories became low. Gold Eagles are the best selling 1-oz gold bullion coins in the world, and they dominate the U.S. gold bullion coin market.

Still, if concerns about the dollar continue to grow, gold and silver buying could cause Silver Eagles and Gold Eagles could again be in short supply before year-end. Silver Eagles in a mint-sealed box sell at $1.75 each over spot. The U.S. Mint prices Silver Eagles on the London market, which normally runs a few pennies higher than the U.S. market.

Gene Arensberg, in his Sunday Nov. 11 Got Gold Report for resouceinvestor.com, asked: “Why didn’t gold sell off?” If the Got Gold Report had been scheduled one day later, Arensberg wouldn’t have asked the question because gold and silver suffered big setbacks Monday, which was Veterans’ Day, with further drops Tuesday. Today, however, gold and silver rebounded in early trading.

Still, today’s gains are not nearly enough to wipe out the losses of Monday and Tuesday, which begs the question: Is the decline over, or is there still more to the downside before the metals renew their upside movement?

Arensberg was looking for gold (and silver in a sympathy move) to drop based on the record large commercials’ (LCs) short position in gold as of Tuesday Nov. 7. (Weekly positions are reported Thursdays as off Tuesdays.) With Monday’s and Tuesday’s drops, did the LCs reduce their short positions significantly?

Further, the LCs could have added to their short positions late last week as gold moved to 27-year highs. The commitment of traders report (COT) is as of Tuesday, but is released Thursdays, so the LCs could have added shorts late last week as the metals climbed, and they could have reduced their positions Monday and Tuesday.

Which puts us back to: Is the decline over, or is there still more to the downside before the metals renew their upside movement?

Frankly, I don’t know, and neither does anyone else. Still, analysts and traders (Note that’s traders, not investors.) who follow the market may be looking for a deeper decline because the LCs record position in gold. This week’s COT will shed more light on how the LCs see future action.

Arensberg’s comments on silver were interesting, particularly in that they are in line with my thoughts on silver vs. gold. Read Arensberg’s report for the details, but here are the comments that jumped out at me:

Is silver expensive here? Well, in a word, no. It may be due for a short term pullback technically, but with gold knocking on the door of its all time nominal highs silver has a mountain to climb value wise to achieve the same goal. In fact silver could triple from right here and still be under its all time 1980 nominal peak of $50. And in 1980 dollars were “worth� a lot more than now.

Adjusted for inflation silver’s 1980 $50 peak would equate to about $125 in today’s weakened U.S. currency, so silver would have to increase eight-fold just to match its peak purchasing power back then. Is that hyperbole? Well, perhaps a little, but even if silver’s 1980 mania-driven spike was a once-in-a-lifetime financial fluke, it traded for weeks over $35 back then, or the equivalent of $87.00 today. Silver could increase 400% and still not have the same purchasing power it garnered for weeks in 1980 in other words.

As for the technical short-term pullback that Arensberg suspects may be in the works, is it over? Frankly, I suspect the decline may not be over, but I am not advising any long-term investor not to buy at current levels. In the long-term, gold and silver remain favorably priced considering all the uncertainties the world faces. In the short-term, however, gold and silver can drive you crazy.

By the way, here are the gold market “drivers” that Arensberg sees:

. . . big honking write downs by the financial sector giants, a pipeline attack in Yemen, civil unrest and martial law in nuclear armed Pakistan, heavy weather in the North Sea and record high oil prices nearing $100, a mining strike in Peru, sub-prime woes expanding into prime time loans, major U.S. housing sector anxiety, lots of talk about slowing U.S. growth or even recession heaped on almost certainly higher inflation talk, a very sick and dangerously low greenback prompting increased fiat currency confidence erosion, significant and sustained short covering in both gold and silver … and the kicker this week: A high Chinese official commenting that China will be diversifying into other-than-U.S. dollars accelerating the already underway mass exodus of enormous global wealth out of the buck and mostly into the other global fiat paper promises.

The prospects of the Chinese diversifying out of dollars alone should drive people to precious metals.

“Support for gold as an investment continues to gain momentum, with an increasing number of announcements of purchases by non-Western governments,” says analysts for Canada’s Haywood Securities.

The analysts expect world gold production to decline this year while EFT gold-holdings could top 21 million ounces.

As for silver, the analysts expect that a “positive mix of the main silver price drivers indicates a balance or slight increase in the current silver price, further supporting the view that recent changes in interest may be simply a result of a thin, volatile summer market.”

Read the mineweb.com’s brief review of the analysts’ position.

Before plunging into the silver market, read our Silver Bullion Overview.

A Reuters poll has silver outperforming gold through 2008. I see no problem with that forecast. Historically, silver has always outperformed gold in precious metals bull market; therefore, in any prediction over eighteen months you can expect silver to turn in a bigger percentage gain than gold.

The Reuters poll forecasted gold to average $681 in 2008; I suspect that number to be low considering the geopolitical state of affairs. Further, sometime in this presidential campaign, the candidates will have to start talking about the financial state of affairs in the U.S., which, of course, are not good. In fact, they are very bad, but public concern has been diverted because of the war in Iraq.

Of interest to me was this prediction:

Silver is seen stronger than other metals, with the average 2007 price surging 14 percent to $13.30 an ounce. But it is forecast to fall to $13.00 in 2008, against its spot price of $12.95 and a 25-year high of $15.17 in May last year.

Frankly, I consider it ridiculous to attempt to predict precious metals prices that exactly, especially silver. In 2005, when silver was trading at $7, where were the Reuters polls showing $15 silver in 2006?

Such predictions are made because a large number of investors want to hear them. By 2008, silver could easily be $18 to $20 because of geopolitical events or recognition of the dire financial state of affairs in the United States, but to say that it will be $18.27 would be ridiculous.

Newmont was a longtime darling of “pure gold” stock investors, having eschewed the hedging and the forward sales that its rival Barrick Gold so often bragged about. However, in 2002 a three-way merger brought Newmont a hedge book and the supposed genius who formulated it.

Whereas prior to the merger Newmont boasted of being a “pure gold” stock play, Newmont reversed course by continuing the acquired hedge book. That turned out to a costly decision. Now, Newmont has seen the error of its ways.

With its shares selling at a 22-month low, Newmont announced it is eliminating its entire 1.85 million-ounce gold hedge position. In June, the company spent $578 million to eliminate its forward sales contracts, and will report a pre-tax loss of $531 million on the early settlement of these contracts, after a $47 million reversal of previously recognized deferred revenue.

Although the company tried to spin the announcement that its “merchant bank” unit was not all that bad, the fact is “the company expects to incur a non-cash impairment charge of approximately $1.7 billion, to be recorded as part of discontinued operations, in the second quarter of 2007,” reports the mineweb.com.

One point seven billion dollars, that’s a major hit for anyone’s pocket book. However, what’s bad news for Newmont shareholders is good news for gold and silver investors.

Although there is the possibility that the hedge book can be sold to another brave speculator will continue it, it is more probable that large quantities of gold, and probably silver, will have to be purchased to settle some of the hedge book deals. Perhaps today’s solid jumps in the price of gold and silver can be attributed to Newmont’s announcement.

The really goods news for gold and silver investors is that one of the world’s largest gold producers will no longer be in the involved in hedging and forward sales of gold and silver. Hedging and forward sales result in artificially increasing the supply of gold, which puts downward pressure on the price of gold. Both activities “bring gold to the market” before it is actually mined. Newmont’s announcement is indeed good news for gold and silver investors.

For further details about Newmont’s decision, read mineweb.com’s article.