June 21, 2024

Gold and Silver Consolidate Recent Gains As Threat Of Sovereign Defaults Grows

Gold and silver prices, as measured by the London PM Fix Price, were largely unchanged on the week.  Gold slipped by $18 per ounce while silver declined modestly by $.05

Gold has rallied almost $100 per ounce since late January but has failed to decisively break out to new all time highs.  Silver, the standout performer in the precious metals sector has rallied furiously since late January, gaining $10 per ounce for an increase of 36%.


Despite the current attempt by Congress to implement very modest budget reductions,  fewer and fewer people seem to have faith in the long term value of the dollar.  The value of gold has not gone up for 10 years straight by accident – it is the result massive increases in debt and the looming threat of paper currency depreciation as governments resort to the printing presses to avoid defaulting.  (See Why There Is No Upside Limit for Gold and Silver).  Recent comments by two prominent individuals reinforce the view that the potential fallout from the debt crisis will be severe.

Bill Gross of Pimco, the world’s largest bond investor, writes in his April 2011 Investment Outlook,  “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”.

John Lipsky of the International Monetary Fund warned that the level of debt by developed nations is unsustainable, having reached levels last witnessed after the end of World War II.  According to Mr. Lipsky, “The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks.  The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion”.

The reality of a democracy is that we elect those who promise to provide us with the most benefits and entitlements.  Under these constraints, the temptation by elected officials to use printed money to meet promises that cannot be kept is irresistible.  Yes, the promises will be kept but they will be paid for in dollars that have little purchasing value.

Precious Metals Prices
Fri PM Fix Since Last Recap
Gold $1,418.00 -18.00 (-1.25%)
Silver $37.63 -0.05 (-0.13%)
Platinum $1,773.00 +21.00 (+1.20%)
Palladium $772.00 +18.00 (+2.39%)

Platinum and palladium both gained on the week, continuing a rebound from recent sell off lows reached during the height of the panic related to the Japanese earthquake.  Since mid March, platinum has gained $73 per ounce while palladium has gained $60 per ounce.  In late February palladium was at the $860 level while platinum traded in the $1850 range.