Coin Update» Gold and Silver Commentary

Rampant Public Deception

Patrick A. Heller — Mon, 23 Jan 2012 22:59:24 +0000

A major theme in my writings is that the mainstream media is not doing its job. Far too often, the media is taking spoon-fed economic and financial headlines from governments and their major trading partners and passing along the information as being true. There are too many instances where the underlying information negates or contradicts the thrust of the headlines, but the media fails in their duty to inform the public of the truth. This failure could be from lack of comprehension, simple laziness, or perhaps because the media support the philosophy of the headlines.

So, much of what I write is devoted to shining light on the data that the mainstream media ignores, omits, or distorts. Here are some more examples.

From a lot of headlines in the past month, many people might be sensing that the US economy is slowly starting to improve. This apparent good news could come from reports that consumer sales are up, banks are earning more profits, consumer prices are holding the line, and employment is rising.

Unfortunately, each of these points is unfounded and contradicted by the underlying facts.

Sure, the Bureau of Economic Analysis (BEA) reports that general business activity in the United States has recovered to its pre-recession levels. If that really were true, you would think that at least one other major economic series would confirm that information. None of them do. While the BEA claims that Gross Domestic Product (GDP) is growing, inflation-adjusted data for retail sales, production and housing show either slow growth or outright contraction on either month-to-month or year-to-year basis.

While the Commerce Department Bureau of Labor Statistics most recently reported that GDP has grown almost 2% from year earlier levels, researcher John Williams at www.shadowstats.com reports that US GDP has been continuously declining since 2007!

Just after Thanksgiving weekend, there was an outpouring of positive reports on holiday season sales. Some of these were derived simply by counting the number of people in malls rather than obtaining actual sales data. Then there were reports of higher car and truck sales by the manufacturers. Well the truth is coming out now, and it’s not very rosy. Supposedly, overall holiday shopping exceeded 2010 levels by 3-4%. However, if you discount this increase by the more than 3% consumer price increase from the prior year as reported by the Bureau of Labor Statistics, sales were flat. If you instead use real world consumer price increase data such as computed by John Williams, consumer prices were almost 6% higher than a year earlier. Using this data, the quantity of goods sold in the 2011 holiday season was actually down from what was sold in 2010!

It’s no wonder that chains like Sears, Kmart, and Bloomingdale’s announced more store closings and others like Tiffany reported falling sales.

Even the automotive sales figures are rigged. Automotive companies record sales when vehicles are moved onto dealer lots, not when they are sold to consumers. In 2011, dealer inventories have grown so much that this almost completely accounts for the so-called boom in automotive sales.

Then there are the deceptive quarterly profit reports from major US banks. Bank of America claimed it made $2 billion in the most recent quarter. However, in the fine print, the Bank acknowledges that it had not yet recorded bad debt losses from fraudulent mortgages by $5 billion. As part of its assets, Bank of America lists $125 billion in home equity loans. A high percentage of home mortgages are underwater, where the mortgage exceeds the value of the property—in which case the home equity loans are technically worthless! It is likely that Bank of America has yet to book sufficient losses that it is facing on this category of assets.

As for JPMorgan Chase, it was sued last week for allegedly fabricating documents in order to recover a greater amount of funds in bankruptcy proceedings. I suspect that such suits will likely be settled before trial, at a cost to the bank that is probably going to run into the billions.

For all of 2011, the construction industry broke ground on 607,000 new homes, according to the Commerce Department. That was up 3.4% from 2010, which is good news. However, the median average price at which all homes, new and previously occupied, changed hands in 2011 declined to its lowest level since 2002. For the housing sector to return to normal, new housing starts would have to rise to 1 to 1.5 million per year.

According to the Department of Labor Bureau of Labor Statistics, there were 135,254,000 non-farm civilian workers in the US in December 2008. Three years later, even though the US population increased by several million, the number of non-farm civilian workers had declined by over 2-1/2 million. There were just over 8.9 million unemployed in December 2008, but the total soared to more than 13.7 million three years later.

The unemployment picture is supposedly improving. However, John Williams calculates the unemployment rate using the methodology employed by Bureau of Labor Statistics until 1993. By that formulation, US unemployment levels are currently about 22%.

Interest rates and mortgage rates may be close to all-time record low levels. And the Dow Jones Industrial Average may be holding at elevated levels even as US investors are consistently abandoning the stock markets. The interest rates and Dow Jones average are all manipulated by the US Treasury and the government’s trading partners—sometimes openly admitted.

If things were really so wonderful as the mainstream media is reporting, then there would be no reason for the Federal Open Market Committee to announce any major plans at the conclusion of their meeting Wednesday. But I would not be at all surprised if they stated that they find it necessary to stimulate the real estate market. However carefully they may couch their language, I expect the Fed will start to unveil the next round of inflation of the money supply, this time on the order of $1 trillion.

Such a step will inevitably drive down the value of the US dollar even further. Gold and silver prices will rise even faster. And those who believed the mainstream media and failed to protect themselves will be even poorer.

Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes "Liberty's Outlook," a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles". His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His 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 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.

What Happens When a Currency Fails?

Patrick A. Heller — Tue, 17 Jan 2012 21:28:21 +0000

As I expected, my last column where I raised the question whether it would really be so bad if the US dollar failed brought on a storm of comments. Along with many thoughtful points, there were some comments from people who just didn’t think through the implications of my question.

Perhaps another story from history and then a look at how people in two nations are today coping with troubled currencies will provide more light on the subject.

The failure of the Continental dollar in the Revolutionary War deeply scarred the national psyche. As a result, the US Constitution specifically prohibited any state from making anything but gold or silver legal tender in payment of debts. Though paper currency was common in most European nations by then, the US government did not issue any paper money until the beginning of the Civil War, 74 years after the Constitution was written.

This issue of unbacked paper money (called Greenbacks) to help finance the Union’s cost of pursuing the war was advocated by Treasury Secretary Salmon P. Chase. The lawsuits contesting the legality of the US government issuing unbacked paper money did not reach the US Supreme Court for several years. When they did, it happened that Salmon Chase was then one of the justices serving on the Court. Initially, Chase voted with the majority to affirm that his actions to issue unbacked paper money was unconstitutional. After President Grant appointed two new judges, the new majority ratified the legality of paper money issues, though Chase still voted that his own actions in the Civil War were unconstitutional.

Even as Americans were legally required to accept Greenbacks as legal tender, it didn’t work smoothly in California. Though these notes stated that they were acceptable for payment of import duties, even Customs officials in California did not like receiving them. Until well into the 1870s, any Californian who forced a merchant to accept paper money instead of gold in payment would find that merchants would thereafter refuse to do business with him or her!

To help the public accept US government paper money, the Treasury began issuing Silver Certificates, redeemable for silver dollars, in 1880 and Gold Certificates, redeemable for gold coins, in 1882.

Now let’s discuss the falling paper money values in modern-day Vietnam and Iran.

Vietnam’s inflation of the paper money supply has been such a problem for the past several years that citizens in that country have to use gold for payment when purchasing real estate. Although the government technically prohibits posting of prices in gold, buyers have learned that sellers will only sell if they receive gold.

The country of Iran is going through severe problems with a declining fiat currency. In just the past month, the Iranian rial has fallen about 1/3 against the US dollar. This is causing an enormous disruption in the economy. The government’s official policy there is to discourage transactions priced in US dollars, but the citizens, as much as they dare, are switching to using US dollars, gold, or consumer goods to preserve the wealth.

The Iranian government has already banned foreign exchange businesses from dealing in US dollars. In the past week, the government has started to crack down on the black market currency traders who might be dealing in US dollars.

The Iranian rial has not failed--yet. However, in the past month the imports of goods into the country have ground to a virtual halt as sellers are unwilling to accept rials in payment. Citizens are aggressively withdrawing their funds from bank accounts that are paying 17% interest to convert them either into US dollars, gold, or consumer goods.

The important point is that even though the Iranian rial has not yet failed, the public is adjusting their spending habits and their means of storing wealth. Former exporters to that country have already switched to accepting payment in alternative currencies. In the process, there are some severe economic disruptions, many of which are caused by government efforts to prevent citizens from taking steps to protect their financial well-being. However, should the rial eventually collapse, that event will be less traumatic because those affected by it will be well on the way to using alternative monetary systems.

That is the key point to understand should the US dollar eventually fail. In reality, the US dollar is following down the path towards collapse, just like the Iranian rial. Long before the dollar crashed, there would be greater economic turmoil in this country as people sought to protect their wealth by abandoning dollars for stable assets like gold, silver, and consumer goods. The process will be made even worse to the extent that the US government tries to interfere with people peacefully serving their own self-interest. There will be civil unrest. And I do expect the American standard of living would decline. All of this will develop before the dollar fails. The actual event of the failure of the US dollar will not be very important.

However a dollar crash could bring on an opportunity for people to adopt a stable monetary system beyond government interference, which could form part of the base to regrow the economy. Although there is no magical reason why they should, I expect that the multi-thousand year track record of gold and silver as a safe haven asset will result in them becoming a major component of any stable monetary system.

An important follow up issue is whether the US dollar and economy are too far gone, making a collapse inevitable. Sadly, I think it has. But that is a subject to discuss another day.

Would It Really Be So Bad If the US Dollar Failed?

Patrick A. Heller — Fri, 13 Jan 2012 19:32:17 +0000

If you asked the average American if it would be a financial catastrophe if the US dollar failed, I’m sure he or she would emphatically agree. In fact, I suspect those answering the question would consider the possibility to be a disaster of epic proportions.

But, if you really think about it, maybe it wouldn’t be quite that horrific.

Here’s what happened in other countries that recently experienced a failed or replaced currency.

The African nation of Zimbabwe suffered such high inflation of the money supply that reached 49 billion percent per month by early 2009! One writer told me of visiting the country a few years ago. After he checked into his hotel, he went to the pool for a dip. He passed the bar on the way and asked how much it cost for a beer. The bartender told him $100 million. After he cooled off in the pool, he stopped at the bar to order that beer and was told that the price was now to $150 million! By 2008 the Reserve Bank of Zimbabwe was issuing $100 Trillion notes.

With prices changing so rapidly, commerce nearly ground to a standstill. Merchants found it almost impossible to purchase inventory and then price it for sale. Consequently, few merchants had any goods to offer to sell.

On January 31, 2009, the government announced that the South African rand, Euro, US dollar, and other currencies would be legal tender in the country. The government suspended the use of Zimbabwe’s currency on April 13, 2009.

In a mid-2010 report, trade policy analyst Albert Makochekanwa stated that Zimbabwe’s inflation rate immediately fell to less than 1% per month. Within a year, manufacturing and production activity in the country had increased by 35%.

By being able to buy goods for payment with currencies that suppliers would accept, local merchants were again able to purchase and sell merchandise. Stores that previously had little or no inventory could now operate normally and profitably.

The result of the failure of the Zimbabwe dollar was a huge economic boom!

A similar story resulted after Ecuador abolished its own sucre on September 15, 2000 and declared the US dollar to be the standard legal tender. At the time of changeover, it took 25,000 sucres to equal one US dollar. As an interesting side note, Ecuadorians are not comfortable carrying paper money, so the US Mint shipped 500 million 2000-dated Sacagawea dollars to Ecuador to satisfy demand for coinage.

There was even a currency failure in early American history. The Continental Dollars issued during the Revolutionary War quickly fell so far in value that they inspired the phrase “Not worth a Continental.” The new nation eventually established a relatively stable dollar defined as a fixed weight and purity of silver or gold. The government also redeemed outstanding Continental Currency at the rate of one new dollar for every 100 Continental dollars, though it took until the early 1800's to fully pay off this exchange.

But, just like what happened in modern Zimbabwe and Ecuador, the ability to use a stable currency, even during times when multiple forms of money circulated side by side, the US economy started growing.

If the US dollar failed today, there would be significant problems, in large part because of the widespread use of the dollar as an international reserve currency. So any transition would not be as smooth as experienced by Zimbabwe or Ecuador. However, as long as the US government did not try to impose a new fiat monetary system, I am confident that the free market would quickly establish a stable monetary system that would spark the return of prosperity faster than most people expect.

I’m not necessarily saying that the US government is mismanaging the US dollar so badly that it will soon fail. But I am saying that if the dollar failed, I don’t think it would be as bad a development as most people would fear.

Forecast of Events That Could Affect Gold and Silver Prices in 2012

Patrick A. Heller — Tue, 03 Jan 2012 20:08:53 +0000

There are a myriad of calamities and catastrophes that could affect financial markets in the US or worldwide in 2012. Pretty much all of them would spur more people to seek to purchase physical gold and silver.

Whether or not these come to pass, and when, and how great an impact they will have on precious metals markets all have some degree of uncertainty today. So, before I get in my range of December 31, 2012 price forecasts, let me review my estimates of the likelihood of each of these events occurring at some point in 2012.

The US dollar will fall against gold and silver by 17% or more—I give at least a 95% probability of occurrence. For the past twelve years, the US dollar has fallen every year against gold, by a compounded average of almost 17%. The dollar has also fallen against silver in nine of the past 12 years, averaging a compounded decline over the entire period almost as much as the dollar fell against gold. US economy and the finances of the US government look to be in the worst position at any time in the past 12 years, so I give this event as high a likelihood as any other event—virtually a “sure thing.”

The US dollar index will decline below 65—I forecast a 50% likelihood of occurrence. The US Dollar Index ended 2011 just over 80. If the Index were to sink much below 70 at any time in 2012, there is a very real possibility of the dollar falling more sharply. The US monetary system could even collapse. However, it is possible that the Index may not fall that far as almost all of the other currencies used in calculating the Index are also seeing their money supplies inflated by their issuing governments. It is this “Mutually Assured Destruction” of multiple currencies that could keep the US Dollar Index from collapse.

One or more of the world’s largest banks classified as SIFI by the Financial Stability Board will fail—I project a 95% prospect of occurrence. The Financial Stability Board operates under the auspices of the G-20 Group of Nations, effectively as part of a global government. At the G20 meeting in Cannes, France November 3-4, 2011, the Board identified a number of Systematically Important Financial Institutions (SIFI), which are banks and brokerages that are so large that failure of any one of them would pose a serious risk of worldwide financial chaos and collapse. One of them, Dexia Bank in Belgium, failed last year, with the governments of Belgium, France, and Luxembourg propping up the bank to avoid a domino effect of cascading bank failures. With the losses sustained by US and European banks holding European sovereign debt positions, it is almost a “sure thing” that one or more will fail in 2012. In the US, Bank of America is perhaps in the most precarious position.

The Eurozone nations and the US government will both become more dysfunctional at preventing financial crises—which I foresee a 95% probability of occurrence. The latest fiasco where the US Congress, in theory an institution with the combined wisdom to pass timeless legislation, was only able to pass a two month extension of some expiring tax reductions, is sample of what will happen constantly in 2012 in the US and in Europe. Businesses and individuals will not be able to make intermediate or long-term plans because they simply will not know what laws will be in effect even just a few months down the road. As a result, job-creating businesses will be hesitant to expand and hire employees. Just last week, one of my employees who was contemplating a family trip to Europe this summer picked my brain on the possibility that transportation, food distribution, and even what means of payment might be acceptable were all uncertainties. Yes, it really is that bad.

A debt default, at least effectively, by one or more significant world governments leads to widespread financial chaos—I estimate at least an 85% likelihood of occurrence. Technically, there is no reason that any independent nation should ever default on its own debt—if the debt is denominated in the national currency. Governments could simply increase the money supply to repay debt with less valuable money.

However, most nations are constrained by not having enough economic clout to be able to issue debt in their own currency or they are a member of the Eurozone, where 17 nations are tied to a joint currency. High on the list of nations that may officially default on at least some of their debt in 2012 are Greece, Italy, Portugal, Ireland, Hungary, Spain, and France. It would not be a total joke to add the United States to this list as many state and local governments are teetering on the edge. The high risk of default by one or more Eurozone nations will also likely doom the Euro as it is now configured, and may even result in the end of the Euro as a multinational currency.

Another bankruptcy of a brokerage such as happened to MF Global Holdings in 2011 with the result that many more investors see their “secured” assets stolen from them—I expect an 80% prospect of occurrence. It is starting to look like the MF Global bankruptcy is going to end up with the counterparties holdings derivatives getting the lion’s share of assets and the customers of the company getting the shaft. The prospect of this occurring at other brokerages is likely to spark investors to withdraw their accounts. During 34 of the last 35 weeks in 2011, US mutual funds experienced net outflows of investor funds. Any panic that leads to a “run” on a brokerage will likely drive the company to fail, causing a snowball effect of even more investors pulling their funds out of other brokerages.

By the way, the MF Global bankruptcy basically had as part of its fallout the failure of the COMEX to deliver on gold and silver contracts. Expect a high risk of even more of this coming to pass in 2012. Any failure in 2012 would carry the added risk that gold and silver exchange traded funds may not be able to fulfill their obligations to hold or deliver sufficient metals to cover their outstanding shares.

The enactment of Sections 1031-1033 of the National Defense Authorization Act signed into law December 31, 2011 encourages at least a 50% increase in the number of Americans purchasing physical gold and silver—I estimate a 60% probability of occurrence. With the stroke of a pen, President Obama and Congress have conspired to pretty much repeal the 4^th Amendment to the US Constitution. It authorizes the US military to seize any person (including Americans) at any time anywhere in the world (including on US soil) and hold them without pressing charges, bringing them to trial, or even acknowledging their arrest. All the US government has to do is allege that the person is possibly guilty of terrorism or conspiracy to support terrorism, under definitions that the US government dictates, against either the United States of any “coalition partners.” When Americans realize that even the purchase of physical gold or silver might represent lack of faith in the US dollar and could be construed by the federal government as undermining its power, there is a significant chance that will actually spur some new buyers to quickly acquire precious metals “before it is too late.” Such buyers would not necessarily be purchasing it to protect their financial well-being. Rather, I think many of them would become buyers out of fear of what further depredations the US government might inflict on its citizenry.

The US government takes further steps toward seizing the assets of private retirement accounts—I expect a 75% chance of occurrence. Face it, the US government is desperate to get its hands on any kind of financial resources. What better pretext than by proclaiming that in order to protect the value of private retirement assets that the US government will take them and replace them with US Treasury debt that is guaranteed to be “safe?” In one fell swoop, the government could gain trillions of dollars of assets in return for paper promises. There is no other asset pool with anywhere near this amount of assets for the government to attempt to seize. The seizure will continue to develop through a multi-step process, so the mandatory confiscation of private retirement assets will probably not happen until after 2012. But I think it highly likely that more steps will be taken toward that eventual goal.

The disclosure of more evidence that the Federal Reserve and other major central banks do not have all the gold reserves that they are reporting as being in their vaults—I foresee a 75% probability of occurrence. Every year, more documents come out and more public officials accidentally acknowledge that central banks have surreptitiously dumped their gold reserves on the market to suppress precious metals prices. In years past, the International Monetary Fund required central banks to record as being in their vaults any gold that was out on lease or a swap, and also requiring the central bank that had actual possession to record this same gold as part of its reserves. The IMF now permits central banks to stop double reporting of gold reserves, but there is almost certainly much more gold reported as being in vaults that just isn’t there.

This list is by no means complete, but I am confident you get my point.

As one or more of these events occur, that will inevitably increase the prospect of other events coming to pass. If a national government defaults on its debt, that will put more financial pressure on the other governments, central banks, and private banks that hold this debt.

The risks of some catastrophes hitting early in the year leaves me confident with my recent predictions that the price of gold will reach $2,000 and silver $60 by the end of May 2012 at the latest.

As for the end of 2012, prices have a much wider range of possible outcomes. So, here I go with my estimated probability that the gold and silver prices will end within these various ranges:

Range Probability

Gold under $1,500 1%

Gold $1,500-1,999 9%

Gold $2,000-2,499 35%

Gold $2,500-2,999 35%

Gold $3,000-5,000 15%

Gold above $5,000 5%

Silver under $25 1%

Silver $25-49 14%

Silver $50-99 50%

Silver $100-199 10%

Silver $200-399 10%

Silver above $400 5%

As you can see, taking into account the global financial perils that exist, I expect gold and silver to shine in 2012.

Major Gold Market Changes Coming in 2012

Patrick A. Heller — Tue, 27 Dec 2011 22:10:59 +0000

The gold and silver markets took us on wild rides in 2011. Guess what? They will be even more volatile in 2012.

According to GFMS, one of the most respected analysts of precious metals markets, the Chinese market, government and private, will absorb more than 22 million ounces of gold in 2011, sharply higher than 2010 levels. That means that the Chinese are taking about 30-35% of all newly mined gold off the market. The total probably would have been even higher except for the difficulty in acquiring physical metal.

What will have perhaps the greatest impact on the gold market was just revealed within the past ten days. A London metals trader recently reported that the Chinese government is aggressively negotiating with multiple gold mining companies to purchase their entire gold output on long-term contracts. This is the same London trader who spilled the beans in 2003 that the Chinese were buying gold reserves, which was not confirmed by the Chinese nor reported by the mainstream financial press until 2009. He is definitely in a position to observe such activity and has a stellar record of accuracy.

To the extent that this is true and that the Chinese do succeed in signing contracts, this could have an enormous impact on gold trading. On the surface, it may appear that it shouldn’t really matter whether the Chinese acquire the same number of physical ounces of gold direct from the mines or by taking delivery of London or COMEX contracts. So, it may take a while for the general public to understand the implications of this shift.

If the Chinese purchase directly from the gold mining companies that means that fewer ounces of gold will appear on the London or COMEX markets. The COMEX is heavily leveraged, where it only has a small fraction of the gold to meet the contractual obligations of existing contracts. If it stops receiving as much physical gold as years past, it will have to sharply reduce selling paper contracts for gold and perhaps even close out a large number of existing short positions.

The impact on the London market, the world’s largest gold trading center, would be even more extreme. Theoretically London contracts are traded to result in the delivery of the physical metal. However, the market is currently leveraged to a greater extreme than the COMEX. At the Commodity Futures Trading Commission hearings in March 2010, analyst Adrian Douglas estimated that the London market could only cover, at most, 3% of its physical gold liabilities. Analyst Jeffrey Christian then testified that the London exchange only held one ounce of physical gold for every 100 ounces of liability to delivery physical gold!

Think about it. If the London market receives five million ounces less of physical gold in 2012 than it did in 2011, those who have sold contracts on that exchange may have to liquidate as much as 500 million ounces of short positions by purchasing metal elsewhere to fulfill contracts or by paying cash to settle their position. Even with recycled gold, annual global new supplies are less than 100 million ounces. Just imagine what would happen to the gold’s price if there was a supply squeeze anywhere near this magnitude!

Even if the Chinese don’t sign contracts to tie up mine production, there are still lots of brewing calamities that could cause prices to rocket upward in 2012. Among them are:

The failure of one or more of the world’s largest banks
The outright debt default of one or more significant national governments
The US government takes further steps toward seizing the assets of private retirement accounts
A default in delivery by a sizable gold or silver exchange traded fund
A declaration of force majeure and the inability of the COMEX or London markets to continue operations
More concrete evidence that the Federal Reserve and other major central banks do not have all the gold reserves that they are reporting as being in their vaults
A continuing major downturn in the US real estate market
If governments around the world are uniformly unsuccessful at achieving major spending cuts
A detailed report of how and where hundreds of millions to billions of customer dollars were effectively stolen in the MF Global Holdings bankruptcy
Huge inflation of the money supply by major nations

There are more potential catastrophes than these few, but I think it gives you the idea.

Even the mainstream media in the past few months is reporting just how many of the world’s major banks are in dire straits. Perhaps Bank of America is at most risk, with its share price right at the threshold where many owners would be required to liquidate their holdings of this bank.

The unfolding MF Global story could have the largest impact. The implications of how customer money disappeared could trigger a run of investors, fearful of also having their accounts stolen, withdrawing their accounts from every brokerage.

For those holding out hope that the economies might muddle through somehow, the agreements made in the past two weeks for the US government to sharply reduce the value of major paper currencies (as a result of inflation of the money supply, whether called quantitative easing or something else) is bound to lead to far higher gold and silver prices in 2012.

Sprott Asset Management recently filed paperwork to issue shares totaling $1.5 billion. These funds would be used to purchase physical silver. This single acquisition, which would be about 50 million ounces at today’s silver prices, could trigger a supply squeeze all by itself.

Gold and silver prices have been knocked down enough over the past few weeks to cause even the most ardent owners of physical precious metals to question the strategy of owning gold and silver. If you simply realize that no magic cures for the world’s financial woes have been achieved, and if anything, the troubles are getting worse by the day, I think you will feel more comfortable maintaining your gold and silver positions.

Instead of dumping your precious metals holdings, I urge you to make them more secure. If you own shares of a gold or silver exchange traded fund because of the convenience, sell them off and replace them with physical metals under your direct custody and control. Do not store physical metals in unallocated accounts. Convert any certificates into physical metals—while you still can.

Assume that any form of “paper” gold or silver ownership is at risk of loss, just like those who held such accounts at MF Global Holdings. Once you have secured your positions, you will be able to sleep better at night during 2012. Happy New Year.

The Blessings of Gold and Silver

Patrick A. Heller — Wed, 21 Dec 2011 02:18:06 +0000

On August 6, 1973, the US prime interest rate increased to 9%, the highest level since at least 1947. I was working two jobs before my senior year in college. At the time, in my relatively inexperienced naiveté, I thought that the world economy would collapse.

It did, but it didn’t. The Dow Jones Industrial Average had climbed from a low of 631 earlier that decade to a high of 1051 in 1973. It then fell all the way down to 577. The Dow Jones Industrial Average did not surpass its 1973 peak for a full ten years. In the decades since, the world economy has grown to levels I did not anticipate back in 1973.

My hometown did not have a coin and bullion dealership. I had to wait until I returned to college in late August 1973 to find a coin shop where I made my first purchases of physical gold and silver. My resources were limited, as I was paying all of my college costs at the time out of my summertime earnings. But I still had the judgment and foresight to use some of the funds to buy precious metals.

These coins, which were British Sovereigns and US 90% Silver Coins, were sold in early 1980 for a huge profit. When sold, they enabled me to purchase other assets which outperformed precious metals over the next several years. My successful trading of gold and silver on a personal basis also contributed to my becoming a coin dealer in 1981. This provided me enough experience to begin sharing my market observations with others starting in 1995.

Back in 1973, I didn’t know what the future held, but I was fearful of what I expected would soon happen to the world economy. What I didn’t understand at the time was that the people of the United States and other developed countries had acquired great reserves of wealth through, in part, stable currencies backed by gold.

That huge amount of reserve wealth supported the economy during rough times of the mid-1970s into the 1980s. There was enough “fat” in the economy that it was able to survive without a worldwide collapse.

In the decades since, missteps by governments have further consumed accumulated wealth. Politicians have paid for programs to buy votes by raising taxes, inflating the money supply, and incurring debts with theoretical promises to repay them “someday” in depreciated paper currencies.

Today, the reserves of accumulated wealth have largely been wiped out. Therefore, any new government mismanagement is coming back to haunt politicians sooner than in decades past. With the actions of the major world governments, central banks, and major banks in the past few weeks, I am once again fearful that the world is approaching the brink of collapse.

This time around, I am worried for more than myself. I have a spouse, children, and grandchildren who will have to live in the world economy that is coming. Once again, I anticipate severe economic calamities just around the corner.

And once again, I am taking steps to protect my family. I hope for the best, but want to be prepared for the worst. That way, I can better manage whatever comes to pass. I have stocked up on the necessities of life, including water filters and food. In addition, last week I added to my personal holdings of physical precious metals.

It is my hope that the citizens of the world will retain enough skills and talents to help the economy recover after destructive government programs collapse from the burdens that they impose on people. A sound financial basis such as gold and silver will help achieve prosperity once more.

Physical precious metals don’t need a credit rating, which is a guide to the risk of default of a paper asset. Precious metals don’t depend on politicians’ promises. Ounces of physical gold or silver that you have in your direct possession are their own guarantees that they will be worth an ounce of gold or silver tomorrow.

Over two thousand years ago, a baby boy was born in Bethlehem. Three wise men came from the East, bearing gifts of gold (symbolizing virtue), frankincense (prayer), and myrrh (suffering). There is a story that the gold was used to pay the way for Joseph, Mary, and Jesus to escape to Egypt to avoid the murder of Bethlehem’s young children ordered by King Herod.

It is not an accident that gold presented a Christmas blessing to the world two thousand years ago and that precious metals remain a blessing today.

Americans Are Their Own Worst Enemies

Patrick A. Heller — Wed, 14 Dec 2011 23:54:40 +0000

The politicians in Europe, the US, and elsewhere are facing financial problems so bad that, in my judgment, they are long past the point of no return. That means that there is no easy or comfortable way to undo the existing market distortions and adopt sensible long-lasting solutions. Some kind of financial catastrophe is inevitable. It will hurt many more people that you might think and completely devastate far too many. The longer it takes to crash markets, the worse it will hurt people.

Why have politicians let things get so bad? And why are they continuing to add to the existing problems rather than take positive actions? The reason is that most Americans and a lot of people around the world are their own worst enemies!

Here is a good demonstration of that point. Around mid-April, McClatchy-Marist conducted a poll of Americans. Of the respondents who identified themselves as conservative, 78% agreed that the country “is going in the wrong direction.” Of these conservative respondents, 68% identified reducing the federal budget deficit as the top priority.

Yet, when the pollsters asked people which segments of the budget needed to be trimmed to reduce the budget deficit, conservative respondents contradicted their overall convictions. On a cash flow basis, the US government reported that pension and welfare payments (including primarily Social Security, Medicaid, and Medicare) accounted for 60% of total fiscal 2010 expenditures. However, 68% of conservative respondents were opposed to cutting spending on either Medicaid or Medicare. The military budget accounted for 24.5% of cash expenditures, yet 72% of conservative respondents objected to any cuts in military expenditures. Even respondents who identified themselves as either liberal or moderate mostly agreed with the conservatives, though to a somewhat lesser degree.

That’s the problem! Americans think that federal expenditures are too large, yet are opposed to reducing any of the categories that account for the lion’s share of the total. That is the dilemma that the politicians face. People are clamoring for lower government spending, but are against reducing it in the categories where the bulk of funds are being spent! One thing is for sure—the politicians don’t want to ruin their careers by seriously cutting spending. As a result, the prospects for fiscal restraint are almost non-existent—even though the US government is close to financial collapse.

As for how bad the financial problems are getting, I described last week how the major governments, central banks, and multinational banks have effectively declared financial war on the people of the world.

Even civil liberties are at further peril. In November, Sen. Carl Levin introduced S. 1867, which was the annual military appropriations legislation. It passed the Senate by a vote of 93-7 and is awaiting compromise with the different version that passed the House of Representatives. Buried in this 925-page bill on pages 425-427 (Sections 1031-1033) are provisions to permit the US military to seize people around the world who might aid or support those who are opposed to US military actions or to actions of “coalition partners.” This is vague enough to include people who generally are opposed to actions taken by any of these governments. The bill further suspends the right of habeus corpus under US law so that people seized under these provisions could be held indefinitely without trial. American citizens and legal registered aliens who are on US soil when committing such acts, if they are constitutional, are exempt from being treated this way—for the time being.

It used to be that if Americans in other countries broke the laws of those nations, it did not constitute a violation of US law. This bill, if enacted as is, would further expand the US government’s ability to unilaterally apprehend anyone around the world and hold them indefinitely without trial, even if they were innocent of the charges or even if their actions otherwise broke no US laws.

It would only take a few insignificant changes in US law to expand the reach of the US military to include US citizens and legal resident aliens on US soil. Once a government begins expanding its scope, it rarely retreats. In fact, it does tend to expand the scope even further.

Resistance to budget cuts are the same kinds of problems are facing governments in Europe, which is why it will be incredibly difficult to find agreement on adopting major austerity measures and fully implementing them.

Now, as bad as the world’s economies are getting, there is all the more reason for the US government and its allies and trading partners to want gold and silver prices to be suppressed. Guess what, that is exactly what is happening right now. Today, I took advantage of what I expect to be a temporary opportunity by adding to my personal holdings of precious metals. The markets may not yet have hit bottom, but I expect to be smiling by next spring at the latest.

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By the way, my column last week was written in strong words. I intended to wake people up to what is happening now and what is coming in the future. Usually, when someone writes or speaks so forcefully, many people would have a natural aversion to taking the message to heart. To my surprise, I have received overwhelming compliments on what I wrote. There were a few comments posted on last week’s article that tried to belittle the message I proclaimed.

First, rather than attack the message, one writer attacked my motive for writing my column. By pretending that I was only writing to scare people, that would give him or her an excuse to ignore the message.

The second comment agreed with much of what I wrote but questioned my motives as well. In effect, he or she said I only wrote it as a means to sell more gold and silver bullion. This commentator probably has not read my previous columns where I explained that selling gold and silver bullion at competitive prices generates so little profit that it really isn’t worth advertising to do so. If my motive were to increase profits of my companies, I would either be advocating the purchase of numismatic coins or that people sell their bullion. Yes, I seriously hoped that people would step up and purchase silver and gold, but hoping to make a financial killing by doing so was not part of my motivation.

The third commentator stated things I did not put in my article, namely that I advocated that people buy gold at the last major market peak in December 1979 (actually the peak occurred in January 1980). When the market was peaking back then, my companies not only did not advocate that people purchase gold and silver, we suggested that people sell their trading positions, as I did personally.

The second point of the third comment actually confirms a point I made in the column. At the peak in January 1980 (remember, the price of gold back then only closed above $700 for four days), a purchase of gold proved to be financially better (actually, less worse) than buying silver. From the peak, the price of gold only fell about 2/3, while silver dropped more than 90% (this all ignores the effect of inflation of the currency). Therefore, if someone just had to buy precious metals at that time, my recommendation to acquire gold and not silver on the basis of the gold/silver ratio at the time was correct. The third commentator went on to make other sage observations, as do most of those who comment on my columns.

Buy Silver! Buy Gold! Buy Now!

Patrick A. Heller — Tue, 06 Dec 2011 20:11:44 +0000

On November 30, the major governments, central banks, and major multinational banks blatantly declared war against the people of the world!

By my analysis, the US government is the ringleader.

No matter how I look at the events, I just cannot come to any other conclusion.

I think there were two triggering events. First, on November 29 Standard & Poor's reduced the credit rating of 37 global banks, including 14 of the largest banks and brokerage firms in the US. Second, the price of Bank of America’s common stock that day closed at $5.07 per share. The Bank’s shares actually dipped below $5.00 during evening trading.

Had Bank of America’s shares settled below $5.00 the next day, that would have triggered two events. First, many investment funds will not own any companies whose stock is valued below $5.00. Second, companies whose shares are trading for less than $5.00 cannot be owned in leveraged accounts. Therefore, had the Bank’s stock closed the next day under $5.00 there would have been a double flood of shares being liquidated. That could have forced Bank of America into bankruptcy, starting a domino chain of other major bank failures.

That horrible scenario did not develop last Wednesday. Instead, overnight Tuesday and before markets opened Wednesday, central bankers created a coordinated plan to flood the world with paper money.

First, the People’s Bank of China reduced its reserve requirement ratio by 0.5% for financial institutions. Then the Federal Reserve Bank, the Bank of England, the European Central Bank, the Swiss National Bank, the Bank of Japan, and the Canadian Central Bank all reduced the interest rate at which they would loan US dollars by 0.5%.

This was global inflation of paper currencies on the scale of trillions of dollars.

In effect, the governments, central banks, and major multinational banks have elected to reduce values of most paper currencies, with the result that it will take wealth away from the people of the world.

Citizens around the world are so worried about the declining values of their local currencies that they are aggressively converting their money into US dollars. Foreign banks have paid up to 1.6% above the exchange rate to acquire more US dollars for their customers. Other banks are in such shaky financial condition that no other bank will sell them US dollars, no matter the price. As a result, the value of the US dollar has been generally rising for the past few weeks.

Yet, when these coordinated actions were taken last Wednesday, the US dollar index fell almost 1%.

Even though the wealth of the citizens of the world fell, the governments, central banks, and multinational banks enjoyed enormous benefits. All of them were able to borrow funds at lower interest rates than before. It looks like the multinational banks with major short positions in the gold and silver markets were able to cover some of these shorts. The governments and central banks bought themselves a bit more time to try to come up with new ideas on how to cure their cumulative fiscal mismanagement.

The world’s financial problems have deteriorated to such an extent that it is no longer a matter of resolving issues in one, two, or a few nations. Literally, every paper currency is going to fall in value against silver and gold even faster than they have in the past eleven years. Consequently, it now takes a concerted joint effort by the major governments, central banks and private banks to try to accomplish any appearance of stability.

These actions are also effectively an admission that these huge quantities of government debts will never be repaid in currencies that have anywhere close to current purchasing power.

Take this move as your warning that you have very little time left before a financial catastrophe cripples a major swath of the global economy. It simply isn’t possible to now predict when the dominos will start to fall. You may have a year or more, or just months, or maybe only a few days.

Before these calamities hit, it is time to think like a survivalist. The public unrest in Tunisia, Egypt, Yemen, Syria, Greece, Italy, and Spain this year could be just a sample of what could develop around the world, including cities, towns, and villages in the US.

Take action now. That means stock up on food, medical supplies, water filters, and other necessities. It may make sense to acquire a generator or weapons and ammunition (though make sure to get proper training with weapons if you chose to own them). I have seen some people advocating barter goods like cigarettes and liquor. Those would not suit me, but they might be worth considering.

Above all, make sure to buy silver and buy gold! Specifically I mean buy bullion-priced physical forms of gold and silver and take immediate possession of them. Buy them is small size units to be more divisible, such as one ounce or smaller for gold or ten ounces or smaller for silver. Gold and silver are almost universal forms of barter goods because of their multi-thousand year history being used as money.

As long as the gold/silver ratio is above 40, I recommend purchasing a higher proportion of silver than gold. With the ratio between 25 and 40, I suggest spending about an equal amount on both metals. At a gold/silver ration below 25, I urge you to acquire a higher proportion of gold.

I don’t want to come across as an alarmist. But the desperate actions taken by major governments, central banks, and multinational banks on November 30 require immediate attention and action to protect yourself. I wish you well.

Financial World Suffers Worst Thanksgiving Week Since 1932?

Patrick A. Heller — Tue, 29 Nov 2011 18:46:07 +0000

A good case can be made that global finances suffered its worst Thanksgiving week since 1932. The Standard & Poor’s 500 fell 4.7% last week, which is its worst performance for this special week in the last 79 years.

The Dow Jones Industrial Average fell by 4.85%, which was not a record result for Thanksgiving week, but still terrible news.

Over the course of last week, government debt credit ratings were reduced for Portugal (by Fitch from BB+ to BBB- with a negative outlook), Hungary (by Moody’s to “junk” status of Ba1), and Belgium (by Standard and Poor’s from AA+ to AA).

So many people are fleeing the Euro that European banks seeking to obtain US dollars were paying as much as 1.61% above the exchange rate in order to unload their Euros. That was the greatest differential since 2008. Banks could get a more favorable rate by conducting their transactions with the European Central Bank, but such transactions would be publicly disclosed and be considered a sign of financial weakness by any bank making such a swap.

Some marginal European banks were simply unable to find a source willing to do an exchange with them, no matter what the differential.

In particular, Greek shipping magnates are moving as much of their cash and paper assets out of Euros and are also physically moving their paper assets outside of the Eurozone, mostly going to London.

In effect, the value of the Euro is now on a two-tier system. If you are trading within the Euro nations, it has one value. If you want to dispose of Euros and receive other currencies, especially the US dollar, the Euro is worth a lower rate.

Trading in international markets last week generally reflected the expectation that Greece, Portugal, and Ireland will soon abandon or be pushed out of the Eurozone.

The European Union released an estimate that banks will need to add $109 billion in new capital in order to survive the current financial woes. Bank industry insiders predict that the correct figure is much higher. No matter which figure is accurate, where will such funds come from?

Also last week, Russia, Kazakhstan, Colombia, Belarus, and Mexico disclosed that they added gold reserves during the month of October.

Last Monday the Commodity Futures Trading Commission announced that it was seeking public comments that would allow brokerages to seek customer permission to commingle customer and brokerage assets. See the news release at http://www.cftc.gov/PressRoom/PressReleases/pr6145-11.

I am extremely surprised to see this proposal, especially so soon after it looks like MF Global Holdings effectively stole customer accounts through commingling their assets with those of the firm. This regulatory change would allow brokers to use customer assets to help manage massive customer withdrawals if there were some danger that the broker was heading toward bankruptcy. This proposal, as I understand it, is strictly an attempt to benefit the brokers and harm the interest of the customers of brokerage houses.

Last Wednesday, the German government held an auction to sell 6 billion Euros worth of 10-year bonds. Germany is considered the strongest and largest economy of the 17 nations that use the Euro as their official currency. Normally, such an auction would be oversubscribed many times. Instead, only 3.644 billion Euros worth of bonds received bids, less than 65%!

The failure of the German auction could be a true signal of how close the European financial markets are to collapse. If the strongest economy in the continent does not merit sufficient investor confidence to be able to sell a modest quantity of bonds, what does that tell you about how much more weakness there is in the rest of Europe?

There are at least a few analysts that suspect that the Germans arranged this auction specifically so that it would fail. The reason for doing so would be to gain leverage for the Germans to resist being pressured to further subsidize other European nations. I don’t think it really matters whether the German auction was a market failure or was rigged to fail. The important point is that the financial problems across Europe are getting worse, literally every single day.

There just isn’t enough space to recount all the financial woes that hit the US markets last week. Suffice it to say that major US banks are in shaky condition and are losing further ground every day.

As I warned eleven days ago, there was a significant possibility that gold and silver prices would drop early last week, which did occur. However, I am still confident that this drop will be temporary.

A new reason for optimism for higher gold and silver prices occurred last week when Sprott Asset Management announced that it had filed paperwork with the government seeking to raise investor funding of Canadian $1.5 billion in order to purchase physical silver.

When the Sprott Physical Silver Trust first made a purchase of about $575 million, it acquired about 20 million ounces of physical silver. It took months for the sellers to deliver the silver, with Eric Sprott estimating that perhaps half of the silver that was delivered had not yet been mined on the date that the sellers made their sale. Assuming that government approval is secured and sufficient investor funds are received, this new purchase would happen sometime in 2012. At current prices, it would represent a purchase of more than 45 million ounces of physical silver. This huge demand for physical silver would almost certainly start pushing up the price well before the actual purchase was made.

Also last week, the Royal Canadian Mint announced that it had received $600 million from investors in its new physical gold fund. Those funds will be spent to purchase physical gold in the near future. Expect gold prices to get a nice boost when that event happens.

I have previously stated that I expect the price of gold to top $2,000 by May 2012 at the latest and for silver to reach at least $60 by that time frame. Those forecasts may prove to be conservative.

High Risk of Further Gold and Silver Price Suppression by Early Next Week

Patrick A. Heller — Fri, 18 Nov 2011 21:54:20 +0000

"I think we have maybe a few months, it could be weeks, it could be days, before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy, which would be a financial catastrophe dragging the European banking system and North America with it.” –Willem Buiter, Chief Economist at Citigroup

Next Tuesday, the COMEX gold and silver options expire. Next Wednesday, the Congressional super-committee is due to submit their report for cutting the federal government deficits about 3% (using proper accrual basis accounting) over the next decade.

Both of these events carry high risks of financial chaos within the US. The risk that a huge number of gold and silver call option contracts could be “in the money” (i.e. that the contracted price for delivery of an exercised option is lower than the prevailing spot price) that JPMorgan Chase took the extraordinary measure of increasing its COMEX registered silver inventories from about 550,000 ounces to 1,650,000 ounces from November 16 to 17!

As for the super-committee, about a week ago, the Democrat members physically walked out of the meetings. The likelihood of any practical agreement, even though it only covers such a relatively small part of the budget, is close to zero.

In the past few weeks, the financial turmoil in Europe has drawn attention away from America’s mess. The fallout from the MF Global Holdings bankruptcy looks like it will include defaults on delivery of at least one thousand COMEX gold contracts and ten thousand COMEX silver contracts, yet Americans thus far have not panicked about this further collapse of the US financial system.

Over in Europe, the government bonds of Greece, Italy, Spain, and France are trading as if they have a high likelihood of default. The European Central Bank had to step in to buy some Italian and Spanish bonds this week, after recently promising that it would never engage in such activities.

In order to keep the American people quiet, analyst Adrian Douglas two days ago sent out an alert that there was a strong likelihood that the US government would order a major suppression of gold and silver prices in advance of next week’s events. Since then gold has dropped around 3% and silver fell at one point more than 10%. Douglas says that whatever suppression might occur will be short-lived.

We are not necessarily at the bottom. There is a good chance that gold could dip under $1,700 and silver below $30 before the COMEX close next Tuesday. Prices right now are a bargain buying opportunity and may be even more attractive by early next week. Take advantage of it by acquiring physical precious metals for prompt delivery. Don’t buy “paper” gold or silver or you put yourself at risk of losing it all as are some of MF Global customers.