By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
Over the weekend, France and Greece held national elections. While the media has almost totally ignored the Greek elections, a lot of focus has been put on the election of Francois Hollande as France’s new president. Hollande, the candidate of the Socialist Party, defeated incumbent Nicolas Sarkozy.
Of especial concern to investors was Hollande’s opposition to French austerity measures intended to help manage the current crisis in the Eurozone. Although his election had been anticipated, the actual event has led to the Euro dropping in value.
The main beneficiary of the decline in the Euro has been the US Dollar. Early this week, the Dollar has strengthened against other currencies, oil, precious metals, and other commodities. The price of gold has reached a five-month low while silver is near its lowest level since the start of the year.
I predict that this quick reaction in favor of the US dollar will not last long. The reason why is because the US government is heavily involved in supporting the value of the Euro. If the Euro drops significantly, that will create a domino effect of financial problems.
First, major European banks and governments will become insolvent. That will hurt the value of their debt held by US banks. To save them, the US government would then explicitly inflate the money supply, probably on a larger scale than ever before. This will eventually drive down the value of the US dollar as consumer prices soar.
Already, worldwide food prices have increased 8% this year, belying the US government’s claim that consumer prices are rising by a much smaller percentage.
The current buzz about the strength of the US dollar masks some significant developments that should have led to a rising gold price. First, China’s first quarter gold imports were six times year-earlier levels. Second, the government of India abolished the excise tax on jewelry sales. Just from these two bits of news, investors should realize that demand for physical gold is rising and will keep growing further. However, gold’s price is temporarily down because of the French elections.
Even if I am wrong in my prediction that the US dollar will soon sink and gold and silver prices rise, there are other developments coming in 2012 that will accomplish the same result.
The US government has set a June 30 deadline for nations to stop dealing with Iran, under penalty of being cut off from SWIFT, the global international payment system. Right now, China and India are two nations that are major importers of Iranian oil. Each of these governments is planning to make payments to Iran in forms other than the US dollar.
Should the US government carry out its threat on June 30, I would expect China to quickly put in place a global payment system to compete with SWIFT—without using the US dollar at all. If this comes to pass, international demand for US dollars to conduct financial transactions could plummet. As the excess dollars would be repatriated to the US in return for other goods and services, the value of the dollar will fall sharply. One result would be a major jump in gold and silver prices.
At the end of December, a substantial number of American tax cuts will expire. The higher tax burden will fall disproportionately on those who create jobs. If the US economy is not already back in a recession or depression before December 31, expiration of these tax cuts could wreak havoc. That would put the value of the US dollar at great risk of decline, with a corresponding rise in gold and silver prices.
Gold and silver prices have been relatively stagnant for a few months. A number of investors are questioning whether they should hold physical precious metals right now. I expect that by the end of 2012, they will get their answer in the affirmative and that right now will be seen as a great bargain buying opportunity.
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 at http://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.
During the past decade, taxes on high income earners have been kept low, while middle class incomes have stagnated. During this period job growth has been very sluggish. This shows that it is demand levels, not the rate at which high earners are taxes, that drives job growth and the economy. Otherwise, low taxes on the wealthy would have produced all kinds of jobs, which it clearly has not. If we want demand to be higher, we should keep taxes on middle class people low, but that is not possible if we also keep them low on the wealthy and want to bring the deficit under control. Something has to give in this scenario.
Hi Patrick,
I agree with the thrust of your article, but not the timing. I think the slow-motion crash of the Euro will drag on longer than everyone is expecting. Remember, we’re just now getting to the point where the Greeks are seriously looking at leaving the Eurozone (and even that is in question). A true Eurozone breakup will at a minimum require Spain to fall apart and one of the core countries (such as Germany or France) to get disgusted and leave.
I think we will not see gold and silver prices start to rise until after the 2012 elections, at a minimum, or even longer, unless some other hugely dollar negative event takes place in the meantime. Until then, I am planning to enjoy much cheaper silver and gold.