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.
Why would the US government want to do so?
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
“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”
No, that’s very nearly a lie. The money supply, and its growth, has, and has historically had, nearly NOTHING to do with the price of gold, except in the imaginations of monetary hawks like you and now apparently Barry Stuppler too. The historic correlation between bullion prices and monetary growth is essentially ZERO. A much better correlation is to plot bullion prices against then-current market-expected total rates of return on other vehicles of savings and/or investment. When market average yields (whether interest, dividend, or predictable capital gains) fall, bullion rises. When they rise, bullion collapses. It’s a game of “opportunity costs”. When nothing yields much of anything, bullion, which never has a yield in any case, looks REALLY good. If and when the yields on “paper” investments start to look good, bullion will tank.
The money supply impacts bullion prices in EXACTLY the same way all ducks are black, walk around upright, and speak English with a spit-flinging lisp – the cartoonish way.
I’ll add this – one cannot learn economics (which includes monetary economics) by reading Internet websites by people with things to sell, listening to Roger Ailes syndicated radio, or listening to an hour-long convention talk, any more than you can learn “financial independence” by attending a hotel ballroom rah-rah session. Being even marginally conversant in economics requires YEARS and YEARS of intensive study, which is COMPLETELY FUNDAMENTALLY DIFFERENT from the years it takes to become a CPA.
Last night, Lars Larsson had on an economics professor from the U. of Oregon who had everything exactly correct. Lars belittled him after their segment was over. Lars is an ideologically driven [j word that refers to a donkey]. Stop being one, Patrick, …please?
David Lisot’s talk on Varney’s show does raise one interesting point on which I’d assume you agree, and even I do, as well. We seem to be witnessing a disconnect between what paper gold and silver traders think and what physical holding gold and silver traders think about whether bullion is overpriced or underpriced.
Here’s my thesis. The entire physical delivery market is as a gnat’s eyelash compared to the paper-based market, so what they say goes, and the physical market gets whiplashed. We’re just along for the ride. The short-term effect is physical form premiums may rise quite a bit.
Sorry Kurt, just because you assert that that the historical correlation between the growth in the money supply and the price of gold is zero does not mean you are correct. The US government fixed the price of gold up into the 1970s. However, if you start in 1913 and chart the 100-year correlation between the rise in the US money supply and on the same chart post the changes in the price of gold you will that over the very long term there is a high degree of correlation. Yes, in the short term, which could even last ten years or so, you may not have a correlation. But try posting the chart I describe and see what it shows.
As for precious metals having no yield, I wholeheartedly agree. An ounce of gold 1,000 years ago is still an ounce of gold today. However, there was a point in the late 1960s where 2 US silver dimes could purchase a gallon of gasoline where I lived. Today, those same 2 US silver dimes can still purchase a gallon of gasoline. Technically it is true that those silver dimes have no yield, but the did hold their value. On the other hand, the $1.00 Federal Reserve Note that could have purchased 5 gallons of gasoline in the late 1960s could today only buy about one quart of gasoline. It doesn’t take years and years and years of studying economics for the average person on the street to understand that track record.
I have not heard David Lisot’s talk, but there is a developing disconnect between paper contract prices for precious metals and the markets trading physical metals. Almost every day I receive reports of what prices physical metals are trading at in various nations. There are countries right now where you have to pay more than $50 over the spot price to acquire physical gold and more than $2 over the spot price to buy physical silver. While it is true that the volume of precious metals traded in paper contracts dwarfs the volume of the actual physical metals (this is a fact, not a thesis) ultimately the value of paper contracts depends on the confidnece that the owners have in being able to actually turn them into the physical metals. I don’t think anyone has the crystal ball to say when a major loss of confidence in paper markets might happen, but I suspect it will and that it will occur much sooner than most people would guess.
Patrick,
In my talk at the ANA Chicago 2011, then called Numismatic Theater, now called Money Talks, I DEMONSTRATED the lack of a useful correlation between money supply growth and bullion prices. Not an assertion, a proof! But yes, you’re correct about one thing. None of the analysis covered either pre-1933 or even pre-1971. Why? Because monetary economics changed FOREVER in that interval, completed in 1971, and will never be revisited again. That’s right, THIS is an assertion: we are never going back to metals based currency, except by literal civil war, complete with millions lying dead in the fields and streets. So nothing that happened pre-1971 has any relevance to me.
The ANA offers my talk as #11-052, and it runs 56:22 in length.
The problem with Civil Wars is that those with money tend to have the means to ride through it. In such a scenario, the guy who held on to five or ten ounces of gold- all he could afford- probably has little better chance to keep his wealth throughout the conflict- much less survive or thrive in such a terrible situation.
This gold argument gets so old and tiresome that it feels like retrograde motion to even discuss it.
What my talk also did show about being in an economy with a metals based currency is that recessions are longer and deeper, on average, and far far more frequent.
On this note, wasn’t the Gold Standards Act of 1900 and its repercussions partly responsible for the Federal Reserve Act of 1913? I’d say ironic, but it makes perfect sense.
i think gold has already had a big run and it is almost over, 300 to 2000 is 6x can it really do this again if it does gold 10000 i dont see this what is it really worth i cant eat it .
This whole issue has never made sense to me. In order for gold or any other store of value to be effective, won’t you have to spend it? Let’s say you buy gold and set it aside for a rainy day. Inflation wrecks the dollar, but you have your gold. I imagine the economic crisis will last a little while… surely you’ll have need of money, in whatever form. So you spend some gold. What have you managed to do? Trade gold for a certain amount of commodities at a better rate of exchange than you can get for fiat currency? Unless you also stocked up on life’s necessities, I can’t see any way out of the fact that you will be losing all of that gold, eventually. Then what?
In other words, if you can afford to buy more gold now than your neighbor, you can afford to hold onto a past standard of living for longer during an economic emergency. Seems the benefits are due to wealth in general, not gold in particular.
Here’s the Reader’s Digest condensed verion of the monetary lie that Heller, Stuppler, and now Lisot are falling prey to:
On February 18, 2013 the M2 money supply was 10.4126 trillion dollars.
On February 21, 2000 the M2 money supply was 4.6596 trillion dollars.
The ratio? 2.23x. In 13 years.
Now, in 2000, the average price of gold was $279.11, and right now gold is $1572.50 and has been beat up for a year and a half. It WAS $1900 when I sold out at Chicago ANA. I sold every scrap of GENERIC (non-numismatic) bullion I owned at ANA Chicago. Even if we use the lower number today, the ration is 5.63x.
You need a WAAAAAY more thorough explanation of bullion being up 5.63x than a 2.23x increase in the money supply.
In my opinion, it is mostly ill-informed ideologically driven hype about buying gold on conservative talk radio’s airwaves. Too much froth even at $1572.50. They have been incredibly successful at creating new demand. That’s why prices are where they are – Limbaugh and Hannity and Larsson fans will buy whatever they advertise. It’s the “Tea Party Gold Bubble”, nothing more. It also tracks the loss of normal returns in paper investments since 2000.
It seems to me that EVERY currency ever devised has been manipulated and debased by clever minds and greedy souls where more is never enough.
I agree we will never go back to a metals based currency, but not because it is any better or worse a means of conducting transactions. It won’t happen because our social and economic reality requires that we have the ability to create unlimited amounts of debt using worthless paper created out of thin air to feed our delusional and myopic vision of endless growth.
Even the best economists, if there is such a thing, are just guessing as to what might happen in the future as none can see the unintended consequences of our insane behaviors, much less learn anything from our past.
We live in a world where ideology is religion and rhetoric becomes fact, and so long as we are fed and entertained we have no curiosity to look behind the curtain or peer past the illusion that we actually have control over our future.
Drink the kool-aid and trust the magician, we are all already past the point of no return.
But that is just my opinion…….
Oh and Kurt….If the “Tea party Gold Bubble” is just an example of conservative talk show marketing, why do you think all those Central Banks are now net Buyers of gold? You know the Chinese and Russians have so much in common with the Tea Party.
Actually, they do!! If you’ve ever watched the economic commentary by Max Keiser on RT, the state-run Russian English-language television station, it is EXACTLY the same rant coming out of the Tea Party right! So you raise an interesting question – what do they have in common? I have an idea.
The Russians are interested in totally discrediting ANY U.S. administration for strategis reasons, and the Tea Partiers are interested in discrediting THIS ONE in particular for political reasons. They are temporary allies. My byline on Twitter is “The Coin Collecting Keynesian”. It is almost an oxymoron, but not quite. I never let ideology cloud by formal economics education. It is possible to be both a conservative and a Keynesian, despite the neocons’ best efforts to make them mutually exclusive.
I trust one way out – economic GROWTH – ultra-growth or even hyper-growth. Where do I want the new industrial base? Here. Everywhere here.
Also, whoever is speaking for CoinWeek now, your information about central banks net purchasing of gold is getting a wee bit stale, don’t you think? No central bank strategy lasts very long. They strategically turn on a dime and transact wisely, to avoid wild swings. By the time you stop writing about them buying, they’re half sold off.
Scott Purvis here. CoinWeek is not beating the drum for either the buyers or the sellers of gold. Just asked a simple question. Prior to 2010, almost all central banks being net sellers of gold,and for the last Two Years, as a group, they have been net buyers, including China which some might argue has a rather robust economy? Why have so many central banks been increasing their gold reserves if there is no inflation, if the money supply isn’t a factor, and when gold is a non-performing asset class from a by-gone era? Just looking for an answer without the ideology and partisan political crap.
We have no dispute about central bank net buying in the 2010-12 interval, with the possible exception of the second half of 2012. Heck, right up until about August of 2011, I was a net buyer, too. Neither the central banks, nor I, have the luxury of getting “emotional” about a commodity, ANY commodity, based on its now 42 years out-of-date status as the basis for money, or not. Now numismatic material? Yes, there is some emotion there for me, well beyond a desire to denigrate the post-1971 dollar.
Scott, you are one of the “true believers”, like Patrick and now Stuppler. It shows in your body of work. Nothing I can say will ever dissaude you. And that’s okay. You do what you want. But please stop masquerading as an “honest broker” in these discussions.
Now, as regards China – they have been aggressively buying up ALL classes of what I call “parking assets” during their manic growth phase; bullion, U.S. treasuries, currency, stocks, commercial paper, ALL of it. I’ve seen NO evidence their gold purchases have in ANY significant measure altered their overall portfolio mix. If anything, they’ve overloaded on Treasuries. That manic growth phase has now turned downward. The only remaining question is how hard or soft their landing will be. It might be okay, it might get very ugly. They are not exactly paragons of transparency.
I never said the money supply isn’t A factor, it is. It explains a gold price of maybe $600-750 per ounce, no more than that. The rest is a boost in demand due to slick marketing to a willing slice of the demographic pie, and good old fashioned irrational exuberance, exhibited by the “you gotta get in now, before she goes to $10,000” ignorance.
Every once in a while we see someone here with a “we’re headed the same way as Zimbabwe” rant. Really? Well last January, at the NYINC show, I saw a pack of Zimbabwe notes in one tiny packet of one dealer’s one case, that had more face-value dollars in Zimbabwe notes tahn exist in the ENTIRE WORLD in U.S. dollar notes. And some idiots believe it’s all the same problem? Spare me.
Mr Bellman:
You missed my point entirely, but before I get back to that, I need to address one issue.
I am the founder and editor of Coinweek, and for 12 years before that the editor of CoinLink. I have not and do not write a column for CoinWeek and never have, so what supposed “Body of Work” you are referring to? Since we have never met and you know absolutely nothing about me at all, it is a bit presumptuous to put any type of label on me, much less the moniker of a “True Believer”. Your characterization is just simply wrong.
However I am insulted that you would insinuate that we are not Honest Brokers in any discussion or comments made. CoinWeek has posted over 20,000 articles and commentaries on almost every topic in numismatics in addition to bullion investing, and we offer all opinions the authors care to present. In fact I know that we asked you if you would like to write some articles expressing your thoughts on the bullion markets, which you politely declined.
The point being that neither I or CoinWeek have a dog in this hunt. CoinWeek does not buy or sell coins, paper money or bullion products. What we do, and have done for the past 18 years is publish information and provide a platform for discussion of ALL points of view about coin collecting and investing. We are the most “Honest Broker” in this industry.
Now, back to the real point of my question. I asked – Why have Central Banks around the world been boosting their gold reserves and become net buyers of Gold when for decades before that they were net gold sellers? I understand Central Banks exchanging Treasuries, Bonds and other paper assets. They can create paper money out of nothing so why do they need or want to hold Gold?
Also, Scott, plase DO check with your partner David. He videoed my talk at ANA Chicago. Ask HIM if I didn’t accurately call the VERY TOP of the gold bubble in August 2011, missing it only by two DAYS. It really was a freaky experience. There I was talking while the bourse dealers were paying $1890-1900 an ounce for generic dreck. I sold, I walked, I snickered.
Scott,
I refer to the editorial decisions on what type of opinion pieces have featured prominently in “Coinweek, and for 12 years before that (by) the editor of CoinLink”. The stuff is still out there, as are Patrick Heller’s seemingly omnipresent predictions of hyper-inflation being about a month away. /snicker
Now, we DO have an opinion imbalance in the field of what I’ll call, oh…., bullion focused numismatics, okay? There simply are not as many bullion critics in this field as bullion believers. I DO get that. And you know what’s interesting? SOME of the true believers protested all the way down the slope from 1980 to 2005, too. They sang the praises of gold all the way down, and now they feel some measure of redemption,… or did until about 18 months ago. So, I guess if you’re serving a readership of a mostly single mind, and you are, you give ’em what they want rather than what they need to hear. Smart business decision.
But, there’s always an answer, isn’t there? Bullion markets are being manipulated, inflation formulae are hiding the “true” inflation, whatever. True believers can never be wrong, by definition.
Now to YOUR question: “Why have Central Banks around the world been boosting their gold reserves and become net buyers of Gold when for decades before that they were net gold sellers?”
Well, much in the same way that banks in the post-Glass-Steagall era aren’t banks as we have known them classically, but rather investment/brokerage houses in banking costumes, much as investment houses need inventory of their own to service customers through “making a market” in what customers are buying, they feel a need to have higher gold reserves to service their customers. At least that’s what I assumed. I seriously doubt it’s THEIR hedge against monetary collapse, but rather what they think their customers will want, for better or worse. But, I’ve been wrong before.
But I notice this – the buying trend has plateaued PRECISELY as “long positions” in leveraged gold ETF instruments have also plateaued. Perhaps they (the central banks) perceive a need to deliver SOMETHING to SOMEBODY when the music stops and everybody dashes for a chair. Patrick Heller is DEAD ON CORRECT about one point – there ain’t enough gold in existence to physically serve every investor with a paper long position. ETF’s aren’t buying gold; they’re buying a gold IOU. It only works if the exit is orderly and gradual so each long can be canceled by an equivalent short.
And while it wasn’t in gold, but in essentially mortgages, or rather their bits ‘n’ pieces, we now have seen what happens when the total of paper investment positions vastly outnumbers the entire body of the underlying assets they represent. The whole financial world threatens to metaphorically kill us all unless poor working class schlubs bail out with their tax dollars the bankers with seven-figure salaries who caused the problem.
As for China and India, and their meteoric but possibly finished status as the world’s net wealth obtainers, of course they buy gold. They have to buy SOMETHING, and while they were buying gold, nothing else looked good in the portfolio. Bonds were paying squat, unless you want to take a flyer on Greek or Spanish debt, old-style equities were weak and new tech equities SEEMED overpriced even if they weren’t. Real estate was hurting. But they had all that CASH, and it needed to be put somewhere. Gold was as good as any other option.
Here’s what’s new: if equity returns get back to normal, if interest rates in lower risk countries sneak up, if real estate gets off the schneid, watch the central banks shed gold like it had ebola virus on it.