In an overall boom market for gold and silver, there will be periodic bouts of profit-taking, where prices dip for a short-time. Also, as I have explained multiple times before, the US government, its trading partners, and its allies, have a huge incentive to suppress gold and silver prices.
Those interested in precious metals need to be able to identify whether price drops indicate a genuine market top, a temporary bout of profit-taking, or if they are simply the result of price manipulation at the behest of the US government.
Gold’s price is basically a report card on the US dollar, the US government, and the US economy. If the price of gold is rising, something is headed in the wrong direction. Silver often trades in sympathy with gold. If the prices of gold and silver rise, that would eventually force the US government to pay higher interest rates on its debt. A falling US dollar would lead to higher consumer prices.
Well, the US Dollar Index, a measure of the value of the dollar against a market basket of other currencies.
In response to a falling dollar, the prices of gold and silver soared until near to the close of COMEX trading last Friday. Gold reached another all-time high (ignoring inflation). Silver came close to breaking above its January 1980 all-time high. The indications were that further price rises might accelerate.
Both gold and silver backed off from the highs achieved late Friday. Is this drop a sign of a market peak (as the US government would prefer the public to believe), temporary profit-taking, or were the metals pushed down by aggressive US government price suppression tactics?
The available information indicates that virtually the entire decline can be attributed to desperate actions by the US government, its trading partners, and allies.
Some of the more obvious gold and silver price manipulation tactics of the past eight days include the COMEX twice raising silver margin requirements. Further, at least two brokerage firms last Friday raised their clients’ margin requirements for leveraged accounts far above the higher COMEX minimums. The raising of these internal margin requirements forced many customers to liquidate leveraged accounts.
As a result, a large number of sell orders were executed as the Japanese market opened Monday. The price of silver dropped 12% in only eleven minutes.
Both gold and silver prices have remained extremely volatile this week. This greater price volatility is having the desired impact (from the perspective of the US government) that owning gold and silver are not really safe haven options for investors.
In my judgment, the extreme measures taken by the US government to suppress gold and silver prices in the past week are signs that the COMEX and London Bullion Market Exchange are at heightened risk of default. If they were not at a greater risk of default, the US government would have pursued the less blatant tactics they have used in the past such as sneaking physical gold and silver on to these exchanges. That such a tactic was not used tells me that supplies of physical gold and silver are becoming more difficult to locate.
Indeed, supplies of physical silver are getting much tighter. Delivery times for many products are now at least four weeks. Three primary distributors of US Silver Eagle dollars have stopped accepting orders. Premiums are rising. Even COMEX bonded warehouses are reporting record low levels of registered silver inventories.
I expect the current attack on gold and silver prices to end within a week or two. Once this happens, gold reaching $2,000 and silver maybe getting to $100 will be definite possibilities, possibly by the end of 2011.
Patrick A Heller is the owner and General Manager of Liberty Coin Service, Michigan's largest rare coin and precious metals dealer since 1971. Mr Heller is the editor of the Liberty's Outlook Newsletter, and gold market commentator for Numismaster. In addition he is a columnist for The Greater Lansing Business Monthly, and has a radio show on WILS-AM 1320.