By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
As I have said before, the price of gold represents a report card on the US government, economy, and dollar. If the price of gold is stable, that is probably a positive sign for all three. If, instead, the price of gold is continuously rising, that alerts investors, consumers, and foreign governments that something is seriously amiss in the US.
A rising price of gold eventually leads to the result that people want to get out of dollars and replace them with alternate assets. When this occurs, the value of the dollar declines against other assets. This would result in higher interest costs for debt denominated in US dollars, of which the US government is the largest such debtor. Therefore, the US government has a greater incentive than any other party to put a lid on potentially rising gold prices, as measured in US dollars. Further, since the price of silver generally moves in tandem with gold, that means that the US government also has a motive to suppress the price of that metal as well.
The US government, with the largest budget of any entity in the world, has tremendous political and financial resources that can be used to achieve goals such as holding down gold and silver prices as long as possible. It can arrange to disseminate false financial information, and encourage the mainstream media to mindlessly repeat it. To the shame of the profession, too many journalists take the easy path of simply echoing the misleading data spoon-fed to them by the US government, its trading partners, and allies.
There was relatively limited news coverage as silver rose from $3.51 around the turn of the century to almost $50.00 in April 2011 at the same time that gold was climbing from about $250 to over $1,900 in September 2011. Had this track record occurred for a publicly held company, you can bet it would have earned multiple headlines. In contrast, while gold has dropped about 22% and silver 35% from the beginning of last October, we have been inundated with reports that precious metals are now in a bear market! Gold is still up more than 450% and silver 550% from the lows, but the public is being urged to dump their precious metals before the bottom falls out of the market.
Markets can and do change, but in my judgment this is one of the most flagrant efforts of public deception I have ever seen. Gold and silver are being crucified in the eyes of the public with a series of big lies. Let me list some of the most outrageous examples.
Big Lie #1: “Gold Is Not A Safe Investment.” In his April 11, 2013 column in the New York Times, economic writer Paul Krugman specifically wrote, “historically, gold has been anything but a safe investment.” Out of all of human history, Krugman selected one 20 year period, from 1980 to 2000, as evidence to support his point.
Well, if you are going to talk about history, then let’s do so. Over thousands of years, physical gold and silver have never failed as money. In contrast, of all paper money issued in history thus far, every one has eventually failed, with the average life being only 40 years.
If you want to consider shorter time frames, the price of gold as measured in US dollars has risen from $20.67 per ounce when the United States Constitution was adopted in 1787 to almost $1,400 today. If you look over the past 100 years since the Federal Reserve Bank was established in 1913, you get the same comparison. If the US dollar is supposedly a safe asset, wouldn’t one that has outperformed the dollar by more than 67 times over the past century be considered even safer?
Big Lie #2: The Reason To Own Gold And Silver Is As A Protection Against “Inflation.” Protection against the inflation of the money supply or rising consumer prices has long been a significant purpose for owning precious metals, but there are other factors. Perhaps the most important reason to own gold and silver is to counterbalance the risk of owning paper assets like stocks, bonds, and currencies. In other words, consider gold and silver as insurance from the possible decline of paper asset values.
From 2001 to 2011, worldwide inflation of the money supply and consumer price increases were relatively modest, yet gold and silver prices soared during this time. Demand has been rising as more Chinese and Indian citizens are achieving middle class status, more central banks are buying, and the appearance of exchange traded funds have made it more convenient for people to invest in precious metals.
Big Lie #3: Gold And Silver Prices Are Down More Than 25% From Their 2011 Peaks. This statement is true, but only if precious metals are valued in US dollars. On September 6, 2011, when the US dollar price of gold was $1,870.00 per ounce, the cost in Japanese yen was 145,231 per ounce. As I write this, the price of gold in US dollars is about $1,396.65, down 25.3% from September 6, 2011. However, today’s price for an ounce of gold is 139,861 yen, down just 3.7%. As measured in the Brazil real, the price of gold is down just 3.0% over the same period. As measured by the South Africa rand, gold is actually up 2.8%!
Silver is significantly down in all currencies since September 6, 2011, but it has fallen much less in Swiss francs, euros, and just about all other world currencies than it has against the US dollar.
Big Lie #4: Demand Is Down For Physical Gold And Silver. The US government and the media are scrambling to find any statistics that they can to try to make the case that demand for physical precious metals is falling. For example, the Associated Press picked up the World Gold Council’s report that global gold demand in 2012 declined 4% from 2011. There are two major problems with the focus of that report. First, the average price of gold in 2012 was about 6% higher than in 2011, which means that global gold demand in 2012, as measured in US dollars, actually increased about 2%. Second, the World Gold Council reports consistently underreport global gold demand. The tens of millions of ounces of gold being added to the central bank reserves in China and a number of other nations are completely missing from the WGC analyses. Because of this, no accurate analyses of the gold market can be made using WGC data.
Lately, much is being made of the decline of inventories at GLD, the largest gold exchange traded fund. The government and the media are trying to claim that investors are bailing out of the precious metals markets. The truth is almost exactly the opposite. Demand for paper contracts for gold and silver are declining, but buyers for physical metal are gobbling up record quantities. The demand is so strong that some major banks and brokerage firms are being forced to redeem their shares of exchange traded funds to withdraw the physical metal in order to meet customer demand. So, the decline in GLD and other precious metals ETFs has more to do with huge demand rather than a decrease in buying interest.
Since the middle of April, customers of my company have had to wait as long as 4-6 weeks after payment in order to take delivery of newly manufactured bullion-priced gold and silver coins and bars. Year to date, my company’s sales of ounces of bullion gold and silver is running well ahead of 2011’s record levels. Other dealers I talk with are going through the same experience.
Big Lie #5: Gold And Silver Are In “Bubbles.” Typical bubbles involve assets that quickly double in prices, which then fall 50%. That happened to the New York Stock Exchange in 1929, to the NASDAQ in 1999, and to Japanese stocks in 1989. It happened to gold and silver in 1979 to 1980. In that boom, gold tripled in price over seven months, then experienced a 45% drop in the two months after the peak. After silver peaked in January 1980, its price fell 80% over the following two months.
This time around, gold and silver prices have achieved steady annual increases for the past 12 years. Gold is down only about 27% from its very highest price in September 2011. Silver is down almost 55% from its peak two years ago, but it is still many times higher than it was in in 2001. Price movements for neither metal fit into the class description of an asset bubble.
When you separate fact from fiction, and realize that the financial problems of the world have never genuinely been solved, it seems obvious to me that both gold and silver are now at bargain price levels compared to where they are likely to reach in the coming months and years. When you see through these big lies and understand why they are being trotted out to the public, it will ease your concerns about continuing to hold precious metals.
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