By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
The statement issued by the Federal Open Market Committee (FOMC) at the conclusion of their latest meeting last Wednesday was close to a verbatim repeat of the announcement at the end of the May meeting. The contents of this pronouncement pretty much matched what I had predicted in advance in my column last week.
After the statement was issued, Federal Reserve Chair Ben Bernanke held a news conference to discuss the results of the meeting. As a result of the statement and Bernanke’s comments, the US stock and bond markets tumbled. Even though the Federal Reserve did not increase its interest rates, the rate paid on 10-year Treasury debt rose significantly.
This rise in the interest rate occurred even though investors were abandoning stocks and other bonds and moving into Treasury debt, increasing the value of the US dollar relative to other currencies in the process. Such a move would normally lead to lower interest rates on the 10-year Treasuries, but that rate has now risen about 45% since the beginning of 2013.
Bernanke’s comments shocked the public where he stated “If the incoming data . . .” supported the FOMC claim that the economy is improving and that there was a realistic possibility that the official unemployment rate might fall to 6.5% or less, then the Federal Reserve could begin reducing the levels of quantitative easing later this year and maybe even end the program in 2014. Apparently, most Fed watchers missed the word “If.”
As I explained in my column last week, this will not occur. The Federal Reserve is trapped where even the slightest reduction in quantitative easing would burst the current stock, bond, and real estate bubbles and would cost the US government tens of billions more in interest costs. I also mentioned that the Fed cannot let the public understand that this inflation of the money supply is locked in, because people would then take steps to get out of all paper assets, including the US dollar.
With stock and bond prices falling last Thursday, the US government couldn’t risk that investors would flee paper assets to safe tangible assets such as gold or silver. So, exactly as has happened so many times before, the prices of gold and silver were also knocked down through the use of large trades that sellers looking to maximize the price they would realize on the assets they were selling would never use. Instead, these sales tactics were guaranteed to sell gold and silver paper contracts at the lowest possible prices.
Gold and silver prices are well down from where they were at their recent highs in 2011, and even since the beginning of 2013. Plenty of people who expected much higher prices this year are wondering if their research is simply wrong. It is good to continuously update one’s forecast for the future. However, I expect the 12-year bull market in gold and silver to continue for at least several more years.
I think the words of Jim Rogers, perhaps the world’s most widely known commodity investor, are worth considering. In an interview he gave to HardAssetInvestor.com on June 18, Rogers said, “Bull markets climb a wall of worry. . . . But when you look back at the stock bull market from 1982 to 2000, stocks collapsed in 1987, ’89, ’90, ’94, ’97, ’98. And every time, people said that the bull market is over. But it wasn’t. This bull market in commodities will definitely come to an end someday. But someday is not here yet.”
Patrick A. Heller was honored with the American Numismatic Association 2012 Harry J. Forman Numismatic Dealer of the Year Award. He owns Liberty Coin Service 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 (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