April 23, 2024

As World’s Most Predicted Financial Crisis Approaches Precious Metals Move Higher

July 23, 2011 by Leave a Comment

Precious metals gained across the board for the third week in a row.  Silver and palladium were the top performers this week with each advancing almost 4%.

July has seen an explosive move in the precious metals group as worries intensify about the twin debt crises in Europe and the U.S.  In both cases, governments and central banks are avoiding the tough choices that must be made when debt levels reach unsustainable amounts.  Common sense dictates that over leveraged borrowers with insufficient income to service debt must eventually default, or gradually reduce the debt through a combination of austerity measures and income growth.

Common sense, however, is a trait sorely lacking in politicians.  Nor does preaching austerity to your constituents enhance the odds of being re-elected.  The preferred solution, which has been employed since the 1980’s, is to add more debt and let the future take care of itself.  What’s different this time is the growing realization that at some point the compounding of debt becomes unsustainable, enslaving future generations and inhibiting economic growth.

The widely discussed study by Rogoff and Reinhart definitively documents that when public sector debt to GDP approaches the 90% level, economic growth slows dramatically – (see This Time Is Different: Eight Centuries of Financial Folly).  Since most of the developed world economies are already at or above the 90% debt to GDP ratio, the prognosis for future economic growth to gradually reduce debt levels becomes a tenuous prospect.

Despite the obvious risks of a growing debt burden, a significant number of the Washington elite insist that the debt limit be raised by another $2.5 trillion which would represent a doubling of the national debt in a little over five years.

Raising the debt limit, which became a routine ritual in past years, has suddenly morphed into a potential default situation as a growing number of responsible political leaders refuse to rubber stamp another massive increase in public borrowing.  As debt limit negotiations broke down today, the odds of a potential default by the United States became a distinct possibility.

Will a temporary default become a seismic event?  Who knows, but if gold had advanced by one dollar per ounce for each time I’ve seen an article predicting financial Armageddon, if the debt limit was not raised, gold would be well over $4,000 per ounce.   If the U.S. does “default”, it will not be the end of the world.  In the best case scenario, a brush with default may convince more members of our EZ spending Congress to come around to the financial common sense of men such as Ron Paul.

http://youtu.be/sEP8cQF-QC4

Summary of Ron Paul’s comments to Congress:

  • Countries that are as indebted as the U.S. always default.
  • The real increase in the debt this year, counting entitlements, is $5 trillion.
  • In the past 3 years, the dollar has been devalued by 50% against gold.
  • Default will be through inflation.

Gold advanced by $15 on the week and is up $119 since July 1st.  Silver advanced by $1.50 on the week and has gained $5.82 since July 1st.

Platinum and palladium both advanced on the week by $33 and $30 respectively.  Platinum has gained $85 and palladium $57 since the first of the month.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,602.00 +$15.00 +0.95%
Silver $39.67 +$1.50 +3.93%
Platinum $1,793.00 +$33.00 +1.88%
Palladium $807.00 +$30.00 +3.86%
Filed Under: Featured, Gold, palladium, Platinum, Silver, US Debt Crisis, Weekly Recap Tagged With: , , , , , ,

Gold Gains Slightly On Week While Silver, Platinum and Palladium Decline

June 18, 2011 by Leave a Comment

Precious metals had a tough week as silver, platinum and palladium all declined, while gold registered a small gain.

As measured by the closing London PM Fix Price, gold gained $8.25 on the week after declining by $10.75 in the previous week.  Gold remains in a solid long term uptrend.  Since early 2009, gold has remained above its 40 day moving average and every dip to the 40 day moving average has followed with rallies to new highs for gold.

Gold’s last decline to the 40 day moving average in January of this year was subsequently followed by a rally of over $220 per ounce.  A correction to the 40 day moving average would bring gold back to the $1,400 level.

 

GOLD - COURTESY STOCKCHARTS.COM

Gold has held above $1,500 as world financial markets, oil and other commodities have declined substantially over economic worries.   As the European Central Bank struggles to prevent a Greek default that could trigger a series of other sovereign defaults, debt yields are soaring not only in Greece but also Spain, Portugal, Italy and Ireland.

Markets are beginning to reflect the unavoidable truth that we are reaching an end game where sovereign governments have become the new systemic risk to the financial system.  As debt burdened governments face the prospect of financial collapse and political unrest, the only option will be to sell new debt to the central banks who will buy the debt with newly printed money.  As central banks worldwide compete with each other in massive currency debasement, gold will soar to new highs beyond predictions of the boldest gold bulls.

As the slow motion collapse in Europe unfolds, investors in the U.S. seem resolute in the belief that “it can’t happen here, we are not Greece.”  This argument is rejected by Bill Gross who runs Pimco, one of the largest bond funds in the world.  According to Gross, who recently announced that he would stop buying U.S. Treasury debt, the U.S. is actually in worse shape than Greece.

The total debts of the U.S. government, including off balance sheet obligations for open ended social programs, totals $100 trillion.  Gross notes that “To think that we can reduce that within the space of a year or two is not a realistic assumption.  That’s much more than Greece, that’s much more than almost any other developed country.”

Critics who dismiss the warnings of Bill Gross point to the current level of low yields on U.S. treasury debt.  Why would the U.S. be able to sell its debt at such low rates if the finances of the United States are worse than Greece?  The answer is that crises develop in a linear fashion.  Investors don’t worry about credit risk until the crisis is upon them and suddenly everyone wakes up and panics.

Carmen Reinhart of Harvard and formerly of the IMF correctly predicted that a sovereign debt crisis would follow the financial crisis of 2008.  In a study of bond markets as a forecasting tool, Reinhart showed that rates are a poor forecaster of  repayment risk.  According to Reinhart, “Very often, interest rates are a coincident, rather than a leading indicator” of a looming financial crisis.

Preserving wealth during the next financial meltdown will require taking steps before the inevitable crisis develops.

Precious Metals Prices
PM Fix Since Last Recap
Gold $1,537.50 +8.25 (+0.54%)
Silver $35.39 -1.99(-5.32%)
Platinum $1,751.00 -78.00 (-4.26%)
Palladium $754.00 -61.00 (-7.48%)

Platinum had a volatile week, declining by $78 on the week to $1,751.00.  After moving up by $650 per ounce between July 2009 and May 2010, platinum has been consolidating its gains.  During 2011, platinum has remained in a narrow but volatile trading range between $1,700 and $1,850 per ounce as traders try to sort out whether the predominant demand for platinum is industrial usage or investor demand.

PLATINUM - COURTESY STOCKCHARTS.COM

Palladium had the biggest decline in the precious metals group, falling by $61 per ounce for a loss of 7.48%.  After reaching a high on the year of $858 in February, palladium has been correcting in a sideways pattern.

 

PALLADIUM - COURTESY KITCO.COM

Silver declined by $1.99 on the week to $35.39 after a gain of $2.19 in the previous week.  After the sharp decline in early May, silver has been building a base in the $34 to $38 range.

 

SILVER - COURTESY STOCKCHARTS.COM

Filed Under: Featured, Gold, palladium, Platinum, Silver, Statistics Tagged With: , , , , , ,

Federal Reserve May Cause Stampede Into Gold and Silver This Week

April 25, 2011 by 2 Comments

At the end of a two day Federal Reserve policy meeting, Fed Chairman Bernanke has scheduled a news conference on Wednesday that has the potential to rattle markets worldwide.   Every analyst and investor at the news conference is certain to focus their questions on Fed plans after the scheduled completion of QE2  in June.

Current market expectations are that the Fed will not announce a new program of asset purchases and will initiate steps to slowly reduce the size of its bloated $2.5 trillion balance sheet.  Through the end of June, the Fed will have purchased $600 billion of treasury debt using newly created dollars, after having purchased $1.7 trillion of assets under QE1.

The Federal Reserve has been supporting the skyrocketing federal deficit by purchasing 85% of all new treasury debt since QE2 was initiated.   Some analysts think that interest rates on US debt will increase once the largest buyer of treasury debt steps aside.  The withdrawal of massive stimulus by the Fed could also cause a sell off in stocks and bonds, and result in lower housing prices and higher unemployment.  Under this scenario, another round of quantitative easing by the Fed would become inevitable.

Chairman Bernanke’s comments on the Federal Reserve’s exit strategy from a super easy monetary policy could cause major moves in many markets, especially precious metals.  If the markets sense that the Fed may need to initiate another round of quantitative easing, gold and silver prices will explode to the upside.  This prediction is based on the results of the current QE2 program which benefited certain asset categories but did little to help the average American.

Since last August when it became clear that the Fed would initiate QE2, we have witnessed the following results.

  • Home prices have continued to decline.
  • The 30 year mortgage rate has increased from 4.2% to 4.8%.
  • New housing starts declined to all time lows.
  • The 10 year treasury note rate has increased from 2.6% to 3.4%.

The Fed has continued its policy of near zero short term interest rates at the expense of consumers who receive virtually no return on savings.  Banks, meanwhile have increased US treasury and agency securities to a massive $1.7 trillion, benefiting from the spread between short and long rates.

The Fed’s policy of overt currency debasement, while helping to increase exports and earnings for multinational corporations has resulted in the dollar declining to the all time lows reached in early 2008.   Foreign countries with dollar reserves are protecting themselves by diversifying out of dollars and into other currencies and hard assets.

The lower value of the US dollar, while helping multinational corporations, has resulted in higher oil and food costs which has put  additional strains on consumers already burdened with excessive levels of debt and declining incomes.

Unemployment has remained stubbornly high despite unprecedented fiscal and monetary stimulus.  The Fed can print money but it cannot directly create an increase in real incomes for the average American family.  Nor can the Fed fool the people – recent Gallup polls show that almost half of the public has little faith in the Federal Reserve’s ability to do the right thing.

The Fed’s explicit policies of dollar debasement and zero interest rates risks triggering a major collapse in the value of the dollar.   Since last summer the dollar has seen a decline of 16% as investors do the logical thing and dump dollars.

Huge US  budget deficits, uncontrolled spending  and money printing by the Fed resulted in a warning by S&P that a credit downgrade on US debt was possible, putting further pressure on the US dollar.

QE2 liquidity did result in higher stock and precious metal prices benefiting a minority of Americans while doing nothing to solve the problem of too much debt and too little income.  Reliance on the Fed to come to the rescue with ever increasing amounts of cheap money has become the last resort, self defeating option.

The gold and silver markets are reflecting the failure of  unsustainable fiscal and monetary policies which virtually guarantee further appreciation in the precious metals sector.  Any pullback in prices should be viewed as a long term buying opportunity.

Filed Under: Gold, Silver Tagged With: , , , , , , , ,

For Silver, This Time It’s Different

April 19, 2011 by 5 Comments

To many investors with a sense of history, the four most dangerous words are “this time it’s different”. The phrase is usually evoked in an attempt to justify why a huge price gain in a particular asset class can continue to defy common sense and historical valuation norms. A surfeit of explanations on why “this time is different” is usually enough to send seasoned investors to the exits.

Silver, having defied the low expectations of many investors, has now seen a monster rally of 392% from $8.88 in October 2008 to the recent market price of $43.67. The pace of the advance has gone almost vertical with silver gaining 60% from the lows of late January.

Long term silver investors no doubt remember the aftermath of the last rapid run up in silver prices to $48.70 in January 1980. Silver prices collapsed shortly thereafter and ultimately slid to the $5 range where it remained throughout the 1990’s. Silver dropped off the radar for most investors and remained dead money for 25 years before decisively breaking out of a very long base in early 2006.

Will history repeat with another meltdown in silver prices at some near point in the future, or is the rise in silver prices indicative of a major trend change in our economic future? I have never believed that the mechanical application of past price trends was a useful tool for predicting the future. Each point is history is unique with new players and new sets of circumstances. Understanding today’s fundamentals are far more important than ascribing importance to past events that are largely irrelevant.

To understand why silver prices are in the initial stages of a long term super cycle advance rather than a replay of the 1980’s, it is necessary to review the differences of the late 1970’s compared to our current situation. Gold and silver both advanced in the 1970’s as a booming, demand driven economy fueled inflation. The huge cost of financing the Vietnam War, low employment and surging wages all contributed to a steadily rising rate of inflation which peaked at 13.5% in 1981. Federal Reserve Chairman Paul Volcker finally stopped inflation dead in its tracks through a series of massive interest rate increases which brought the prime rate to a high of 21.5% in mid 1981. High interest rates caused a severe recession but by 1983, the rate of inflation had collapsed to 3.2%.

Both gold and silver moved dramatically higher during the inflation surge of the late 1970’s and early 1980’s but the meteoric rise in silver prices was driven by specific events. Wealthy brothers Nelson and William Hunt acquired a massive position in silver in an attempt to corner the market. Prices skyrocketed on the news and silver went from $11 per ounce in late 1979 to $48.70 in early 1980. Regulators did not take kindly to market manipulation and margin requirements on commodities were dramatically raised. The Hunt brothers’  ill conceived attempt to drive silver prices higher collapsed along with their net worth. Silver prices plunged to less than $11 per ounce within two months. The last great silver “bull market” lasted less than six months, driven not by fundamental demand but rather by heavily leveraged speculators.

Fast forward 30 years – the finances of governments worldwide have reached the tipping point under ballooning debt levels and massive deficits. Additional borrowing by insolvent nations to rollover debt simply delays the day of reckoning – more debt is not the solution for too much debt.

The message from the gold and silver markets is clear – governments have reached the limits on borrowing and the day of debt Armageddon is approaching. The accelerating exodus from paper assets to historical stores of value is only in its initial stages as desperate governments take desperate measures to stay afloat (see Smart Money Sees The Perfect Storm for Gold and Silver).

The great debt bubble of the United States and much of the rest of the world is reaching its end game as creditors realize that a stealth default of some type is inevitable via a combination of inflation, money printing, currency debasement and/or negative interest rates.  Nor is it likely that S&P’s lowered outlook on U.S. government debt to negative from stable will have any affect on reining in ballooning U.S. debt (see Why There Is No Upside Limit To Gold and Silver Prices).

From a long term perspective, perhaps this time is not different but simply a replay of the history of currencies backed only by the “full faith and credit” of governments.  Voltaire had this to say regarding fiat money – “Paper money eventually returns to its intrinsic value – zero”.

Filed Under: Featured, Silver Tagged With: , , , ,

Gold and Silver Recap: Prices Mixed, Eurozone Troubles

November 28, 2010 by Leave a Comment

Another Precious Week

The big news is once again that the Euro zone is in trouble.  Ireland has rather bizarrely decided to take a bail out loan that it claimed that it never wanted, but that’s not the really, really big news.

No the really, really big news is that the rest of the Euro zone is in trouble.  Both Portugal and Spain are denying that they need bail outs, which to the international markets seems to mean “are in an early rather than a later stage of negotiation”.  Even Belgium is looking vulnerable.  And outside the Eurozone the British, who seem to have been remarkably smug, are also in trouble due to their mainly nationalized banks being up to their neck in bad Irish debt.  So chaos.

And then there’s Korea, where we could have war.  And so more chaos.

But not inflationary chaos, yet.  This has meant that gold and silver swapped places this week.  Gold went up (reflecting a greater danger that the world was going to end soon) while silver went down showing that inflation was probably not likely when everyone’s trying to work out how to wind up a small but rather expansive economy.

Precious Metals Prices
Fri PM Fix Weekly Change
Gold $1,355.00 +12.50 (+0.93%)
Silver $26.62 -0.45 (-1.66%)
Platinum $1,639.00 -11.00 (-0.67%)
Palladium $670.00 -25.00 (-3.60%)

This has not just shown in silver, palladium and platinum prices – it’s also shown in the price for crude oil.  The dollar’s strengthened and everyone’s worried about money going out of the system rather than going in.  Whether this will last is another question, after all although the Euro is a mad concept with a single currency over separate fiscal policies it had a reasonably strong central bank.  Sooner or later someone’s going to start the printing press up as they’ve already done in Washington, Tokyo and London.  And gold rose 3.8% against the Euro.

When looking at the market there hasn’t really been much government action.  The action, as it has been for much of this half of the year, has been among consumers.  For example the GLD ETF, a way of investing in gold if you really trust brokers rather than gold coins in your hand, has been soaking up a lot of the customer interest in gold.  As these ETFs, or exchange traded funds, are adding to the liquidity they could be setting the stage for a sharp reverse.

There’s also some action in Asia as the Indian wedding season is adding yet more pressure as the wedding season starts and Vietnam allows more gold to be imported. One interesting fact is that Chinese consumers have doubled the amount of savings they devote to gold this year to 2%.  There’s plenty of room for growth.

Filed Under: Featured, Weekly Recap Tagged With: , , , , , ,