By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
As I have said many times, the number one reason to own some physical gold and silver is for insurance against declines in the value of paper assets such as currencies, stocks, and bonds. The price of gold is effectively a report card on the value of the US dollar, the US government, and the US economy. The prices of gold and silver tend to rise as the US dollar falls or the US government or economy is weak.
What is a prime method to make people afraid of investing in gold and silver? Beyond simply suppressing prices, you can also arrange for prices to be extremely volatile. Investors crave a certain degree of stability and want to minimize risk of loss. If the prices of particular assets can fall quickly, even though the overall long- term prospects are bright, people will tend to shy away from owning those assets.
What happened on Leap Day February 29 last week is a perfect example of market manipulation tactics planned to make people afraid to own gold and silver.
Since the latest blatant major suppression of gold and silver prices last December, recovery had been strong. By the time of trading in Asian markets early on February 29, gold was closing in on $1,800, up more than 15% from the December low. Silver peaked just below $37.50, up more than 40% from its December bottom. The price rise was accelerating. A quick move up to $40 silver was imminent.
In the course of pushing past major resistance points, even the mainstream financial media were starting to acknowledge that investors large and small were acquiring precious metals.
Looking back, I believe that the US government adopted the strategy of letting fresh investors purchase gold and silver to push up prices somewhat higher, knowing that it had plans to make a major effort to push down prices at 10 AM February 29. Then, according to the plan, as prices then fell, some of these new investors would leave the market as stop loss orders were executed. Other new investors would panic and sell off their positions. Because of this extreme volatility, many of these new customers would become fearful of ever
purchasing gold and silver in the future.
February 29 was the perfect day and 10 AM was the perfect time for the US government to coordinate an all-out suppression of gold and silver prices.
During European trading hours on February 29, the European Central Bank (ECB) extended over $710 billion worth of low-interest loans to member banks. This massive inflation of the global money supply was almost certainly funded by the Federal Reserve through the International Monetary Fund (IMF) to the ECB. News of this round of quantitative easing was the last bit of news that was driving up gold and silver prices prior to 10 AM Eastern time in the US.
At 10 AM, Federal Reserve Chair Ben Bernanke delivered a semi-annual report to the House Financial Services Committee on the state of the economy. The text of his report was little different from his statement in late January at the end of the Federal Open Market Committee meetings. His comments that there was no real reason to recommend a new round of quantitative easing were contradicted by the huge inflation of the global money supply just hours earlier. Nonetheless, his comment about there being no need for quantitative easing
should have sent US stock market and gold and silver prices tumbling. It probably should not surprise you that
the Dow Jones Industrial Average didn’t miss a step.
However, right at 10 AM, even before Bernanke could make his remarks, there was an order to sell a block of 31 tons of gold (approximately 1 million ounces). This same seller eventually sold a total of 1.8 million ounces of gold within a few minutes. In the silver market, a total of about 225 million ounces were sold on paper contracts between 10 AM and 10:30 AM. For both metals, the massive wave of selling started before Bernanke had made his remarks. Obviously, the dumping of gold and silver could not have been triggered in response to what Bernanke said that morning.
This wave of selling was so blatant a price suppression tactic that many market observers who previously rejected the idea that gold and silver prices were manipulated changed their mind. As multiple analysts stated, someone who was looking to sell a position of a million ounces of gold at the highest possible price would spread the trade out over time and among different brokers. Someone who would sell the entire lot in a single transaction was obviously looking to knock down the price of gold rather than engaging in a genuine market transaction.
This huge effort to knock down gold and silver prices—the quantity of silver that was sold in 30 minutes was equal to about 30% of annual worldwide silver mine production!—also needed to be done on February 29 to draw attention away from two other major news developments that day.
First, the International Swaps and Derivatives Association (ISDA) was to announce a decision February 29 on whether the 70% immediate losses on Greek sovereign debt (and probably close to a 100% loss over time) constituted a “default” which would trigger liabilities to counterparties of derivatives contracts. The ISDA consists of 15 large banks, hedge funds, and investment houses. It decides whether any particular “credit event” constitutes a default. The parties who would owe the bulk of derivatives liabilities (JPMorgan Chase, Bank of America, HSBC, Citigroup, and Goldman Sachs) for a default are ISDA members. Obviously, that means that the ISDA is biased against ever declaring a default.
Whatever decision the ISDA would make would be bad news for the markets. If they declared a default, the counterparties (see list in the last paragraph) would immediately owe billions of dollars to cover the losses. If no default were declared, that would be evidence that the derivatives were pretty much worthless as insurance. That would destroy any incentive for future sales of derivatives, an activity that is a major profit center for the sellers.
The ISDA postponed announcing their decision until the next day, then reported a unanimous vote that the Greek “credit event” was not a default.
The other major development on February 29 was the news that the Pan Asian Gold Exchange (PAGE) had effectively been killed before it could go into operation. Apparently, a part-owner of US origin and possibly affiliated with a large US bank had managed to get 24% of the voting control of PAGE, then appointed enough members to the board of directors to succeed in postponing the commencement of operations. At least one of these elected board members was alleged to be a former member of the US Federal Trade Commission, though I don’t know the specific name.
The plans to begin operation of the Pan Asian Gold Exchange were announced last summer. The contracts it would have traded would have been 100% backed by physical gold. They would have been priced in Chinese renminbi yuan instead of US dollars. As such, PAGE would have represented a double threat to the US government—as 100% backed contracts would have offered more protection for investors than those traded on the COMEX and London markets and the use of the yuan for payment would have further diminished the role of the US dollar as an international currency.
By the way, the good news is that other part-owners of PAGE have announced that they are reorganizing and hoping to begin operation of a new exchange operating the same way as planned for PAGE.
Although gold and silver prices fell significantly on February 29 and have been under siege in the days since, there are some strong positive signs for precious metals. Despite the massive suppression, the price of gold has fallen less than 10% and silver is only down 15%. The scale of assets mobilized to knock down prices for the two metals cannot be repeated for a long time. In the long run, all that will have been accomplished with the February 29 assault on precious metals was to create another temporary bargain buying opportunity. Enjoy it while it lasts.
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.