By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com …..
Over the next several weeks, the US government is facing a series of critical financial problems of its own making.
Unless there is a last-minute agreement, this Friday the federal government will experience an automatic annual $85 billion reduction in spending increases called sequestration. This scheduled decrease in the spending increase was adopted by the prior Congress at the urging of President Obama after two failures to rein in runaway federal spending.
Next, on April 1 Congress’s continuing spending resolution expires. Spending resolutions have been used by the government to authorize spending since the Democrat-controlled US Senate has not adopted a budget for several years. Coming after that, in May, will be the debate over raising the federal debt ceiling.
Part of the reason that the politicians in Washington are facing so many self-inflicted financial crises comes from the failure of the federal government to use the more accurate accrual basis of accounting. By ignoring the majority of federal liabilities incurred, because they aren’t paid in the current fiscal year, the politicians can pretend that the annual expenditures and budget deficits are a tiny fraction of reality.
David Walker, who served for 10 years as the Comptroller General of the US government, the highest ranking federal accounting official, points out that Congress is spending trillions of dollars every year that the politicians ignore because they are liabilities that are not paid in the current fiscal year. On the accrual basis of accounting, required for large private businesses, the federal government would be reporting annual expenditures conservatively in excess of $7 trillion per year and deficits of $5 trillion or more!
When the sequestration deal was made, President Obama had promised that he would specify expenditure cuts before the March 1, 2013 deadline. He failed to do so. Instead of staying in Washington to fulfill his promise to reduce the increased spending, he is devoting too much time traveling around the country calling for tax increases and trying to pretend that it wasn’t his administration that requested the sequestration arrangement.
Congress has been equally as culpable in misleading Americans about the spending problem. A spending reduction of $85 billion per year is barely 1% of accrual basis federal expenditures and less than 2% of the accrual basis federal budget deficit. To my knowledge, no one in Congress or the White House is telling the public about the actual $5 trillion per year deficit, much less offering proposals to solve this fiscal crisis. Instead, whatever happens on March 1 will simply be peanuts compared to what the politicians really need to address.
Even though the events of March 1 will be relatively small in the big picture of federal government finances, the politicians are misleading the public about the impact of the possible sequestration. As President Obama describes the consequences, tens of thousands of people will lose their jobs, a wide swath of public services will be curtailed, and the economy will suffer terribly. If the president really believed this, I would think he would consider it a priority to immediately do everything in his power to prevent such a catastrophe.
As for Congress, it should be easy to find ways to cut $85 billion out of annual federal expenditures. But the Democrats and Republicans have not worked together to even accomplish this token decrease in spending. As for finding ways to reduce annual federal expenditures by $5 trillion, no politicians are saying a word.
This same financial crisis will be repeated before the April 1 deadline when the latest “continuing spending resolution” expires and in May when I can just about guarantee that the “temporary suspension” of the federal debt ceiling limit will again be extended further into the future.
So, since the politicians in Washington are not addressing the real financial crises, which could have been resolved them in years past when the problems were much smaller, what is the US government doing to “handle” the problems?
For the past few months, one of the most obvious US government actions has been to aggressively suppress the prices of gold and silver.
Well, the price of gold is effectively a report card on the US government, the US economy, and the US dollar. Part of the reason that the price of gold has been rising for the past twelve years has been inflation of the US money supply, now masked by calling it quantitative easing. As the price of gold rises, investors become more leery about holding paper assets such as stocks, bonds, and currencies. As the issuer of the world’s main reserve currency, the US government has far more to lose than any other country if the price of gold jumps.
What are some of the suppression tactics used? Just about every trading day, there are several quick declines in precious metals prices indicating trades not made by private parties seeking the highest prices for their gold and silver. Further, these trades that are not confirmed by trading activity in related commodity markets such as other metals or oil.
To give you an example of price suppression tactics, I saw one report last week that, within a 60-second time frame, 200 million ounces of paper silver contracts were sold on the market. I know of no governments and no private parties that own this much physical silver, which equals approximately one-fourth of worldwide annual mining production! And who has the financial wherewithal to devote $6 billion to suppressing the silver price? The US government, its trading partners, and allies are the prime suspects.
On top of this, in the past few weeks US government trading partners such as Credit Suisse and Goldman Sachs suddenly came out with predictions of falling gold prices and recommendations that investors should dump their gold holdings. However, at the same time they are issuing their sell recommendations, US government trading partners are scurrying to purchase any physical gold they can get their hands on to cover their own short positions or to fill massive customer orders.
My company has purchased significant quantities of gold from customers following these sell recommendations. In my mind, the actions of Credit Suisse and Goldman Sachs are of questionable legality as these companies have a conflict of interest between themselves and many of their customers. Unfortunately, those who are now selling are likely to regret having done so as the US government’s financial crises continue, the dollar declines, and the prices of gold and silver rise.
Another slick suppression tactic was included in last week’s release of the January Federal Open Market Committee minutes. You have to understand that these minutes for the most part include a series of statements that do not reflect the policies that are implemented. Every single word in these minutes is carefully crafted by the Fed for the effect it might have on the markets. Every attendee at these meetings has to sign off on the minutes before release so that no one can ever claim they were misquoted.
So, what was the gold price suppression tactic in the FOMC report? There were statements from two of the attendees questioning whether the size of the current quantitative easing program should be maintained for as long as previously announced. Remember, these statements have no effect on policy. Still, market reaction was swift. If there is any chance that the Federal Reserve might cut back on the inflation of the money supply, that would reduce the value in owning gold to protect against this inflation.
For a couple of days, a lot of investors seemed to have taken leave of their senses. They should have stopped to consider the implications to US government finances if, in fact, the Federal Reserve reduced quantitative easing programs. Federal government budget deficits are growing. In order to finance them, the Federal Reserve needs to increase future inflation of the money supply. Should the Fed slow down the increase in the money supply, and I’m not even talking about stabilizing or reducing the money supply, the interest rates that the federal government would have to pay on its outstanding debt would rise.
One of the financial crises facing the US government is that it has boxed itself into a corner with quantitative easing. Should the feds stabilize or scale back inflation of the money supply, expenditures for interest payments will rise, adding significantly to the budget deficit. But if quantitative easing programs expand, as I am confident will occur, the US dollar will continue to drop in value. Whichever path the federal government pursues, it will simply make the existing financial crises even worse. The end result will be the same either way—a falling dollar and rising gold and silver prices.
The suppression of gold and silver prices since the November elections have been on a scale not seen since 2008. To me it is a sign of desperation by the US government that it is getting closer to the day when it loses the ability to push financial problems into the future. At some point, and I cannot tell you whether it could be within the next few months or if it might take a few years, the US government will no longer be able to fool the public about the extent of the financial problems. When that day arrives, there is a significant likelihood that the US dollar will fail, dragging other currencies down with it.
Obviously, the best time to have prepared for these financial crises by acquiring gold and silver was many years ago. However, if you have not already done so, right now would be a better time to take action than risk being too late to protect yourself to any degree.
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