By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
Through the long term incompetency of both Republican and Democrat politicians, the US government has backed itself into a financial corner from which there will be no miracle rescue to avoid a catastrophe. The only uncertainty is how long the politicians will try to postpone the day of reckoning.
When you understand that politicians and bureaucrats place themselves first and the people they supposedly serve last, the actions at this week’s Federal Open Market Committee (FOMC) and the associated US government market manipulations followed the expect script that even I could have written in advance.
First, it was necessary to project that the outcome of Sunday’s elections in Greece, no matter who won or lost, would somehow represent a step in the right direction to solving the Eurozone financial crisis. There is no practical solution to this crisis that politicians would ever adopt. Still, it was necessary that the prices of gold and silver be suppressed on June 18 and that stock and bond markets be propped up to give the public the impression that something positive was accomplished.
Then, the Federal Open Market Committee met Tuesday and Wednesday this week. In the current financial problems, they are boxed in as to which options they could pursue.
Here’s the dilemma that the FOMC faced. First, JPMorgan Chase recently reported a $2 billion loss on derivatives trading. The latest figure I have seen is that the losses are now in the $6-7 billion range, but the financial media is still reporting just the $2 billion figure. If the FOMC were to come out with an active quantitative easing program at this week’s meeting, the result would force JPMorgan Chase to report higher losses for the June quarter.
Second, the financial crisis in the Eurozone would require the Federal Reserve to openly or secretly give away up to trillions of US dollars to support the bailouts. The only way to accomplish this is by inflation of the US money supply (quantitative easing). If the FOMC were to come out with a new round of quantitative easing so soon, that could actually panic investors into realizing how serious the European financial crisis really is. So the FOMC is simultaneously under pressure to expedite a new round of inflation of the money supply at the same time that it is under pressure to avoid appearing to do so.
Third, the FOMC’s next two scheduled meetings are July 31-August 1 and September 12-13. A round of quantitative easing could postpone a global market collapse until after the November US elections, which makes this step a high priority goal of politicians. If the FOMC were to hold off announcing a new quantitative easing program until September, both the Republicans and Democrats will have held their national conventions. Any actions at the September meeting risk the charge by either party of being politically motivated rather than being for the good of the US economy. Therefore, the most opportune time for the FOMC to announce a major round of quantitative easing would be at the meeting ending August 1.
The Federal Open Market Committee needs to appear competent. This can be accomplished by a stock market that rises at the time of the announcement at the conclusion of the FOMC meeting, and by gold and silver prices falling. At almost every FOMC meeting for the past decade, gold and silver prices have been suppressed by trading patterns that are not done by typical sellers seeking to realize the highest prices.
Once again, even before the conclusion of this week’s FOMC meeting, the stock markets were propped up, bond markets were held stable, and gold and silver fell. Further, because of the higher level of investor fears compared to just a few months ago, it is politically necessary that precious metals prices fall by a greater amount that usual.
The results of this week’s FOMC meeting were a commitment to continue an economy-destroying low federal funds interest rate at least through the end of 2014 and a continuation of a program to extend Treasury debt maturities. Instead of announcing a formal program of quantitative easing, the FOMC decided to continue an existing sneaky QE program to avoid having the public realize that it is a further inflation of the money supply.
Although there has been a surge of buyers of physical metal since gold and silver prices started falling on Wednesday, the US government currently holds the upper hand. By early Thursday morning, gold had fallen all the way from the $1,620s down to the $1,570s. Silver had declined from the mid-$28 range to the low $27 levels.
There is continuing evidence that other central banks are purchasing gold and silver at these lower prices. Coin dealers around the US are reporting a strong surge in demand for physical coins and bars. If recent patterns are any guide, gold and silver prices should recover within a week.
Knowing the motivation of politicians and how they chose to first act in their own interest, it is almost certain that the FOMC will announce a program of major inflation of the money supply on August 1. Although gold and silver prices may be knocked down for a few days then, this could be a major point in the fall of the value of the US dollar. I recommend that whatever precautions you take are completed within the next five weeks.
By the way, one indicator that the major crash of the global financial system is imminent will be when the US imposes capital controls and US bank holidays occur. It has been about 20 years since the last time such events occurred on a small scale in the US, caused by the savings and loan crisis. When these events start to occur, people will almost certainly experience limitations on their ability to use credit and debit cards. Electronic deposits such as Social Security and retirement payments may be temporarily halted. Checks may no longer be acceptable as payment. Banks and credit unions could be completely closed, so there will be no access to assets stored in safe deposit boxes. In such circumstances, cash in hand will be king.
Since currency controls tend to be imposed over weekends when banks and credit unions are closed, it may be prudent to increase the amount of US dollar currency that you carry in your wallet or have hidden where you live or work. As before, I recommend owning some physical gold and silver as insurance against calamities with paper assets like stocks, bonds, and currencies. As much as I am leery of holding paper currencies, it can make sense to personally have a larger than normal amount of US dollars in your possession for the rest of 2012.
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 athttp://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.