Originally Published in Liberty's Outlook - Volume 17, Issue 9
US Government Knows That Chinese Government Knows About Manipulation! - Extreme Volatility Points To Higher Gold And Silver Prices Soon! - Swiss National Bank Debases Its Own Currency!
In the past five weeks, the prices of gold and silver have been extremely volatile. price ranges for both metals have exceeded 14% during that time.
Through today, the price of gold is up 9% from august 3 while silver is down a fraction of 1%.
During such turbulent financial times gold is likely to outperform silver. The reason for that is that gold is almost exclusively a financial asset, where even the bulk of gold jewelry sold around the world is bought on the basis of its intrinsic metal value.
Silver, in contrast, has a significant industrial demand that is generally growing over time. If manufacturers see their sales slump, they will cut production and need fewer raw materials. That will tend to knock down prices of all commodities, including silver, platinum, and palladium.
Overall, I think the extreme volatility reflects a surge of safe haven demand for physical gold and silver which is being vigorously opposed by continuing efforts by the US government, its trading partners, and European allies to keep a lid on prices.
There are so many recent eruptions of bad news that would drive gold and silver prices higher that perhaps the easiest way to grasp the big picture is to discuss some of the highlights in reverse chronological order.
What Is Driving Prices Up And Down?
September 7, 2011 #1: US President Obama is scheduled to give a speech tomorrow night pretending to be a serious attempt to address the need to create jobs in America. Many of the details were revealed today.
In sum, the plan supposedly will take another $300 billion from taxpayers "but not until after the 2012 presidential
elections" in order to fund temporary jobs over the next year for people that generally support Democrat candidates.
Part of the funds will come from one more round of inflation of the money supply (disguised by calling it quantitative easing). Little to none of the increase in government expenditures will be offset by decreasing other government outlays.
The planned programs are only slight variations of the previous failed bailouts of the past 32 months of this administration (which has continued the failed policies of previous administrations, only on a grander scale).
Since Obama took office on January 20, 2009, the value of the US dollar has fallen by 53% against gold and by 73% to silver!
The repetition of the same failed policies will quickly drive down the value of the US dollar even further in the coming months.
The announcement tomorrow night won't have anything to do with trying to create permanent jobs in the US. It will be strictly a political ploy by a US president in great danger of not being re-elected in 2012.
September 7, 2011 #2: Today, Germany' s Federal Constitutional Court upheld the legality of that nation?s past participation in Eurozone bailout programs.
However, the court also said that the German parliament had the authority to decide how taxpayer money is spent and that no further emergency bailouts could be allowed without first gaining the support of the budget committee of the Bundestag's lower legislative chamber.
This restriction on future bailouts will slow the process and runs the risk that such bailouts would not be approved.
Many German citizens are incensed at being taxed to support the Euro with bailouts of spendthrift governments in Greece, Ireland, Italy, Spain, and Portugal. These bailouts are seen as endangering Germany's financial prosperity. There is so much dissension, even among her own party, that there is a possibility that Chancellor Angela Merkel may see her government fall.
Should Merkel be replaced, it is possible that Germany may elect to abandon the use of the Euro. If this happens, a number of major European banks would be at risk of collapse.
September 7, 2011 #3: To reinforce the German court's announcement, there was a single very large gold sale made with no restrictions on how low of a price at which it might be sold. Within a few minutes, the price of gold dropped about $35.
This is not the trade made by someone interested in receiving the highest possible price for the asset they are selling. When selling large gold lots, prices are maximized by spreading the sale among a number of brokers (each acting without the knowledge of the other brokers' involvement) around the globe over a period of days. For gold to be sold in the way it was today signifies that it was sold for the express purpose of driving down the price of gold instead of maximizing the return for the seller.
September 7, 2011 #4: In reaction to all of the dismal news, the 10- year Treasury debt interested rate soared by more than 10% today, from 1.979% at the close yesterday to 2.20% at today's close of trading.
Actually, both interest rates are ridiculously low when you consider the severe drop on the value of the US dollar in recent years. Yesterday's interest rate was close to the lowest rate since World War 2, virtually matching the low reached on August 18.
With the dollar falling so far in value, the interest rate should be soaring if this debt were being traded in a free market. However, the Federal Reserve has bought 70% of longterm US debt since last November, so it can almost set any interest rate it chooses. The interest of the US government is that the rate be as low as possible in order to minimize interest costs on the federal debt.
That this interest rate soared by more than 10% today is a warning signal that other financial problems could be imploding soon.
September 7, 2011 #5: The British and Japanese governments both announced that they are considering introducing their own quantitative easing programs to drive down the relative values of their currencies.
September 6, 2011 #1: The Swiss National Bank stunned the world by announcing that it would peg the value of the Swiss franc to the Euro. The Swiss franc has risen from a value of 1.7 francs per Euro to near parity over the past few years.
Further, the Swiss National Bank stated that it stood ready to purchase "unlimited quantities" of other currencies (meaning the Euro) should it be necessary to force down the value of the Swiss franc to the peg ratio.
In effect, the Swiss are joining the currency wars in which governments around the world are trying to reduce the values of the own fiat paper money more than other nations.
As might be expected, the market reaction was quick and dramatic. The Swiss franc almost instantly dropped more than 7% against the US dollar and by more than 8% in relation to the Euro. The price of gold rose to an alltime high against the franc.
The Swiss weren?t totally crippling a stronger currency to support a weaker one. They announced that if they had to purchase Euros, they would only do so in the form of German or French government bonds. They would not acquire shakier bonds from other nations.
This announcement will have a huge effect on reducing the desire to own Swiss francs as a "safe haven" asset. When you couple this announcement with the Swiss banks caving in to the US government to disclose within a few days the extent of secret US bank accounts they hold (projected to include perhaps $38 billion in assets), there really isn?t any reason to want to hold Swiss francs or any kind of assets (like precious metals) in Switzerland.
In sum, the Swiss announcement reinforces the lesson that there is no fiat paper currency that can be considered a safe haven asset. As a result of this one event, look for demand for gold and silver to rise in the coming months.
September 6, 2011 #2: Literally a few minutes before the Swiss announcement, there was a coordinated global string of gold sales that knocked the price drown from a then record level of $1,920 to about $1,870.
Such events do not occur by accident. It is a clear case of central banks being notified in advance of this announcement and conspiring to counter the expected result of a surge in demand for gold. In years past, such price suppression was done by more subtle means. That this manipulation was so blatant is an indication that the US government is running out of ammunition for future price suppression efforts.
September 2, 2011 #1: the minor event of the day (which was misreported by the mainstream media as being THE story of the day) was the Bureau of Labor Statistics (BLS) release of the monthly jobs and unemployment report. The headline that was widely reported was that the number of employed and the unemployment rate was unchanged from July to August.
Even these misleading headlines represented horrible news. US stock markets dropped significantly while gold and silver prices rose.
The entire BLS report consists of more than 200 pages. If anyone in the mainstream media had cared to dig down in the data, they would have seen an even worse employment picture. In Table A, the BLS reported that there were 165,000 fewer jobholders in August than there were in July. In the Birth/Death Adjustment, another 87,000 jobs were double counted in August. As I have told you before, even the BLS statisticians admit that the Birth/ Death adjustment is erroneous to such an extent that once a year, for the January report released in early February, they make an annual correction to pretty much eliminate the prior 11 months of this adjustment.
But wait, there?s even more. The BLS also revised the prior two months reports to correct an overstatement of 58,000 jobs (which statistic did receive limited coverage by the mainstream media). So, in total, there were really a decrease of more than 300,000 jobholders in August than were reported for July.
September 2, 2011 #2: WikiLeaks released another mass of US State Department documents. Although it will take time to sift through the entire lot, already three documents have been identified having to do with the US government's efforts at gold price suppression.
All three were cables sent from the US Embassy in Beijing, China to the State Department in Washington. The most significant one discussed several commentaries posted in the Chinese news media on April 28, 2009. This particular cable reads, in part:
"According to China?s National Foreign Exchanges Administration, China's gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the United States and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold's function as an international reserve currency. They don?t want to see other countries turning to gold reserves instead of the U.S. dollar's roll as the international reserve currency. China's increased gold reserves will thus act as a model and lead other countries toward reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the renminbi."
You can read the original US embassy cable at http://www.gata.org/files/USEmbassyBeijingCable-04-28-2009.txt.
A later cable discusses how the US government sought to restrain China from converting its foreign exchange reserves into gold. Instead, the US government wanted to pretty much force China to purchase US Treasury debt. In response, the Chinese realized that increasing their gold reserves would increase their international clout. The link to that cable is http://www.gata.org/files/USEmbassyBeijingCable-02-08-2010.txt.
Finally, a December 4, 2008 cable warns that China's acquisition of gold would be a problem for the US and European governments in their consideration of restoring a partial gold reserve system. That problem would arise because the US and European governments, at that time, held the majority of central bank gold reserves, which would effectively give these governments greater control at resurrecting a partial gold standard. The link to this cable is http://www.gata.org/files/USEmbassyBeijingCable-12-04-2008.txt.
I suspect that there will be little coverage of these three disclosures by the mainstream media. However, you can be sure that other governments will be paying close attention to the revelations. The latest report shows that about 10 central banks reported increases in their gold reserves during the first half of 2011 (with Mexico leading the way), while only about two nations reported declines. Since then, Colombia has added gold reserves for the first time in more than a decade.
It is entirely possible that this development could end up having a greater impact than yesterday?s Swiss announcement. In the coming months, look for other central banks to protect themselves by becoming even more aggressive at adding to their gold reserves, whether or not they officially report doing so. You will also see a higher demand from people who understand the implications that the US and European governments are talking about remonetizing gold and a means to support their paper currencies. Inevitably, that will tend to push gold prices even higher. At some point, a buying frenzy could develop. Don't get left behind.
I could go on with many more stories of what has happened in the past five weeks, but I think you get the idea. Most every development points toward rising demand for gold and silver along with soaring prices.
Global finances are now so shaky that I think there is greater than a 50% probability that gold will surpass $2,000 by the end of September and silver will surpass $50. When I have made such short-term forecasts in the past, my direction has almost always been on target, though it seems like most of the time it has taken slightly longer to reach the forecasted numbers.
It is still possible to acquire physical gold or silver at reasonable premiums for quick delivery. A couple weeks ago, demand for silver was so strong that delays of up to two weeks appeared for some silver bars. Don?t wait for higher prices and the risk of higher premiums and long delivery delays. If you don?t already have 10-20% of your net worth or investment portfolio in physical gold and silver, simply for insurance purposes to protect you against the potential further losses in the value of your paper assets, I urge you to make your acquisitions soon.
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.