By Patrick A. Heller – Liberty Coin Service
Commentary on Precious Metals Prepared for CoinWeek.com
Through the COMEX close on Monday, January 30, the prices of gold and silver had increased more than 10% and 20% over the course of the month. Had these results been realized by any of the major stock indices, you can be sure they would garner headline coverage. But strong markets in gold and silver continue to receive comparatively minimal reporting by the mainstream financial media.
Actually, the value of gold and silver haven’t changed at all. Ounces of physical gold and silver are still worth the same today as they were a month ago. What has changed is that the values of paper currencies, stocks, and bonds have mostly fallen in January.
In mid-January, the US Dollar Index reached its highest level since September 2010. This temporary strength resulted from the weakness in the Euro. The falling value of the Euro was related to the financial problems in many European nations, where sovereign credit ratings were dropped for at least ten countries in that continent within the past month. Governments such as France, Italy, Spain, and Austria were among those hit by credit downgrades.
From its peak two weeks ago, the US Dollar Index has dropped 2%. Investors are now not only afraid of the Euro, they are also afraid to hold US dollars. Last week, the Federal Reserve Open Market Committee announced that it was prepared to unleash new rounds of stimulus, also known as quantitative easing, which are just disguises for the inflation of the US money supply. In other words, the Fed promised to reduce the future value of the US dollar. People are figuring out that this is really what all the fancy words mean, and are already taking steps to find other safe haven assets.
The US and European governments have declared economic war on Iran, which is driving Iranian citizens to abandon their domestic currency in favor of dollars, gold, or other assets. In response, Iran’s government has announced currency exchange controls on January 28. The head of Iran’s central bank announced that all dollar exchange transactions must be conducted at the rate of 12,260 Iranian rials per dollar. At the time, the black market exchange rate was over 20,000 rials per dollar. The imposition of currency controls pushed down the black market rate to 17,000 rials per dollar.
In addition to waging economic war, the US is rapidly expanding army, navy, and air force personnel and equipment relatively near to Iran. France has also dispatched an aircraft carrier to the region. Fear of a major military conflict also hurts the value of paper assets and typically results in higher gold and silver prices.
The price of silver has been particularly supported by the announcement from Sprott Asset Management that its physical silver exchange traded fund (PSLV) will purchase 10 million ounces of physical silver. Analysts are divided whether there is sufficient physical silver readily available anywhere to make delivery on a timely basis. When Sprott purchased about 20 million ounces a year earlier, the company reported that about half of the physical silver it received was mined and fabricated after the date of the purchase. Simply, that means that physical silver inventories are much tighter than the “experts” claim.
This short list doesn’t cover all the problems hurting the values of currencies, stocks, and bonds. However, the important point to realize is that none of these problems are being resolved. I would hope that war with Iran is avoided, but I doubt that any development would mean that military conflict will never happen. With the Greece and Portugal sovereign debt almost certain to default at some point, paper investments are likely to continue to deteriorate as 2012 progresses.
For the past few months I have forecasted that gold and silver prices will reach $2,000 and $60, respectively, by the end of May at the latest. I’m sure that gold would have difficulty holding $2,000 the first time it reaches that level. Silver will probably also experience extremely volatile markets as it approaches $50. So, even though I think gold and silver will shine over the next few months, I also expect prices to be quite volatile. In summary, I think what gold and silver prices did in January are just a taste of what is to come.
Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.