By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com
If you ask the average politician, the financial problems of Europe have supposedly been cured.
Oh yeah?
If that is true, how come the International Monetary Fund (IMF) and the G-20 Group of Nations had to have more emergency meetings in the last few days?
How come the IMF has to literally beg governments to p0ledge another $430 billion of handouts to hold off catastrophe?
If the European economy is so strong, why did the Dutch government collapse yesterday when members of the ruling coalition objected to adoption of an austerity budget (that would result in the Netherlands further subsidizing other European nations)? Remember, the Netherlands is now only one of four European nations (with Finland, Germany, and Luxembourg) that still merit the AAA credit rating.
Why did the Spanish government recently ban the use of cash for business transactions in excess of 2,500 Euros? The fine for violations comes to 25% of the amount of the transaction. Could this move have something to do with Spain sinking back into a recession in the first quarter of 2012, with over 22% unemployment that is expected to rise?
Why has Belgium, another supposedly stable European economy, now taken on so much debt to support three banks that its existing and contingent government debt now exceeds double that nation’s Gross Domestic Product?
Also, why did US Treasury Secretary Geithner state this past weekend that the European nations needed to step up their efforts to avert further deterioration of debt problems?
Would all of this be happening if Europe’s debt problems were really solved?
Perhaps part of the growing European problem is that the rest of the world is also having troubles coming to the rescue.
In a speech yesterday, former Federal Reserve Vice Chairman Donald Kohn worried that US politicians would not take adequate measures on US government debt and deficits before the end of 2012. He stated, “What’s required to put the fiscal deficit on a sustainable path are some difficult decisions having to do with entitlement spending and taxes in the United States. There’s a high degree of uncertainty. . . . there’s a huge risk that they won’t.”
He further said, “You cannot count on central bank purchases to bail out governments, whatever the inflationary consequences.”
Then there is China. The Wall Street Journal reported the latest HSBC China Manufacturing PMI index for April. For the sixth consecutive month, the reading indicates that the Chinese economy is contracting.
With all this economic uncertainty, people are right to be concerned about the near-term value of the paper currencies and other paper assets like stocks and bonds. I am not saying that people need to panic and convert all of their wealth into physical precious metals. But, I am recommending that everyone own at least an insurance position of physical gold and silver.
An amount of 5% to 20% of net worth or total investments should be enough to provide some protection against further declines in the value of paper assets. If you don’t already own some physical precious metals, you may not have much time to prepare. I urge you to take prompt action.
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.
I am not aware of anyone who has suggested that “the financial problems of Europe have supposedly been cured?” Can you provide an example?
Also, isn’t the Chinese economic slowdown a bad sign, at least in the short-term, for precious metals? I’ve read that Chinese demand for metals is decreasing because of the contraction in their economy.
Louis, Some good points. Go to http://www.bloomberg.com/news/2012-02-25/euro-gains-after-greek-debt-bailout-agreement-as-risky-currencies-rally.html and http://www.nytimes.com/2012/02/21/world/europe/agreement-close-on-a-bailout-for-greece-european-finance-ministers-say.html?_r=1&pagewanted=all to read some of the positive reactions to the agreement for Greece’s second bailout.
As for China, a contracting economy does not necessarily translate into lower demand for gold and silver. The latest reports I have seen still indicate that the Chinese government and citizenry are still huge record-setting quantities to compensate for the long time when (especially the private sector) could not purchase gold. The Chinese government is not saying that they are still adding gold reserves, but some of the traders who have been selling it to them confirm they are still accumulating.
One thing to keep in mind about the Chinese is that they use a lot of misdirection in their pronouncements. If they say they are thinking of doing something, you can just about guarantee that they have already gone at it full tilt. I also wouldn’t be surprised if they encourage the rumors that they are scaling back purchases as that would help them continue to buy at lower prices. Don’t ever forget that the Chinese government is aggressively getting rid of US government debt and dollars (while often publicly seen to be a buyer of lesser quantity) by investing in companies and purchasing commodities. Take care.
Louis,
You are correct on all counts. A global economic slowdown cannot be anything but bearish for metals and all other assets. What would be metals bullish, however, is an excessively active hand using the heretofore “usual means” of averting said global economic slowdown.
Therein lies the rub – Patrick expects (and may even claim to see) monetary excesses on the part of central bankers to fan the economic flames. While I agree it warrants a watchful wary eye, it’s not out there yet, because virtually ALL newly created monetary liquidity is sitting stagnant on bank balance sheets, and not getting MUCH AT ALL into the “real” economy.
We need to watch for all those new crisp greenbacks starting to appear “on Main Street”, without a corresponding jump in GDP. If and when that happens, Patrick Heller will turn, in my personal view, from DOPE to POPE.
Frankly, I have FAR more trust in Bernancke’s brain than Heller’s.
Actually, even though I just might be Patrick Heller’s number 1 critic, I find his defensive “insurance position” advice of 5% to 20% in physical metals not all that far off. I’d opine for the low side of that range, and I’m not convinced of the time urgency bit, but a gradual increase to a 10%ish level strikes me as not unreasonable. Risks of all kinds abound out there. The usual warnings of eggs and baskets applies.