July 17, 2024

Precious Metals Little Changed On Week While Investors Ponder Government Defaults

Precious metal prices traded in a narrow range this week.  As measured by the closing London Fix Price, gold, platinum and silver declined slightly while palladium gained $16 per ounce.

After the London close, prices of precious metals rose across the board in New York afternoon trading.  Gold closed at $1,514.50 up $19.70, silver at $35.26 up $.12, platinum at $1,775 up $8 and palladium at $739 up $8.   Buying in the precious metals may have been prompted by late day worries over the downgrade of Greek debt by Fitch Ratings as well as concerns over the worsening state of public finances in Spain, Portugal and Italy.

Yields of 25% on short term debt Greek debt imply that the markets are are pricing in a very high probability of default by Greece.  What markets do not seem to have priced in is the contagion risk of Greek default and what impact that would have on investor confidence, world financial markets and the global banking system.

Meanwhile the U.S. debt crisis continues to brew as the debt ceiling limit was reached with no indication of a resolution by Congress.  If the past is any guide, Congress will let the debt bomb/deficit crisis simmer until the last minute when the debt ceiling will be raised yet again under the guise of “future fiscal restraint” and the deficit spending and borrowing will continue as usual.

Ignoring the eroding financial condition of the U.S. today only ensures that the inevitable financial crisis will be more devastating than one might chose to contemplate.  The timing may be uncertain but the outcome is not.

The American Precious Metals Exchange (APMEX) included a chart in one of its latest email newsletters that depicts the gap between the growth of  U.S. GDP and debt.  The chart graphically illustrates the extent to which the U.S. has been living beyond its means and using trillions in deficit financing to do so.


APMEX also notes that  “If there is no resolution (of the budget ceiling) by August 2nd, there could be disastrous ramifications for the U.S. and the global economy. The U.S. will be in default on its promises to pay. The value of the dollar could drop dramatically.”


Precious Metals Prices
PM Fix Since Last Recap
Gold $1,490.75 -15.00 (-1.00%)
Silver $34.80 -1.40(-3.87%)
Platinum $1,767.00 -7.00 (-0.39%)
Palladium $734.00 +16.00 (+2.23%)

Precious metals, silver in particular, have been undergoing corrective price action during May, but the fundamental reasons for owning precious metals grows stronger by the day.   Demand for precious metals remains strong.  The World Gold Council’s latest report shows that global demand for gold increased by 11% in the first quarter, while buying by Chinese investors reached all time highs.  The trend is still your friend in the precious metals markets and price weakness should be viewed as an opportunity to increase long term positions.

Smart Money Sees the Perfect Storm for Gold and Silver Prices

A broad sell off in commodity prices triggered by a Goldman Sachs prediction of a “substantial pullback” in oil prices had little impact on the strong uptrend in gold and silver prices. Based on the London closing PM Fix Price, gold ended Tuesday off only $19 or 1.3% from Friday’s all time close. Silver, meanwhile, the absolute star of the precious metals group, closed Tuesday at $40.44, up 22 cents from Friday’s 31 year closing high. After the recent huge run up in both gold and silver prices, the very modest price declines suggests that the bulls are on the right side of the trade.

Every bull market has corrections and precious metals will not be an exception. The point to remember is that the U.S. has already passed the point of no return on its inevitable journey to a debt crisis.  The mainstream press focuses on the looming battle in Washington over raising the nation’s legal debt limit past $14.2 trillion, yet there is little discussion of the U.S. Government’s total unfunded liabilities of $75 trillion based on open ended entitlement programs.   The U.S. is in a debt trap from which a painless escape is impossible.

While the majority of Americans don’t know or don’t care about the spiraling debt disaster facing the Nation, smart money is taking steps to survive and profit from the inevitable day of reckoning.

One of the largest bond investors in the world who has a superb investment track record proclaims that U.S. debt securities have “little value.” In recent remarks, Bill Gross of Pimco candidly states his view on how the U.S. debt crisis will soon end. Mr. Gross states that Pimco has sold all holdings of U.S. debt because “they have little value within the context of a $75 trillion total debt burden. Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates.”

The smart money sees the future.  One logical investment alternative to preserving wealth is in the timeless currencies of gold and silver that governments cannot devalue.

The recent sorry spectacle in Washington only affirms that elected leaders are incapable of preventing an eventual U.S. default (see Why There Is No Upside Limit To Gold and Silver Prices).  After scaring half of the old ladies in the country that they wouldn’t get their next social security check, both political parties declared victory after “reducing spending” by $38 billion – a fraction of a percent of total government spending.  Even worse, the Washington Post reports that many of the “spending cuts” are accounting gimmicks and budget tricks that will not reduce overall spending.

The great “achievement” of Congress becomes even more pathetic after considering that the national debt has expanded by $3 trillion in the past two years and projected budgeted spending will add almost another $10 trillion in debt over the next 10 years.  These horrendous projections assume a growing economy and no major adverse macro economic shocks.

Massive  levels of debt and spending commitments leave the U.S. with two ruinous policy choices.  Congress can cut spending dramatically and watch the economy collapse after which the Government would re-institute massive spending programs and quantitative easing on an unimaginable scale.  The second choice is the odds on favorite – continue the parabolic increase in spending and money printing and watch the economy implode as all bond investors (not just Bill Gross) refuse to purchase worthless treasury debt leaving the U.S. unable to meet its obligations. Either way, the inescapable dilemma that the Nation faces has created the perfect storm for gold and silver.