As has often happened early in a new calendar year of late, gold and silver prices have declined. Gold and silver have really been seriously clobbered since late in the afternoon on January 13.
Price drops of this magnitude don’t just happen by accident. There are one or more reasons to explain them. However, the excuses offered by the mainstream media don’t even come close to making sense.
One huge reason why prices dropped from the 13th to 14th is based on fact. Another huge reason is plausible though not derived from admitted fact.
On Thursday, January 13, Moody’s Investor Services issued a report stating that the current fiscal situation in the US is such that, if not reversed, it will result in a lower credit rating for US government debt. Sarah Carlson, senior analyst at Moody’s, said, “We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the US, the likelihood of a negative outlook over the next two years will increase.”
The same day Carol Sirou, who heads Standard & Poors in France, said in a speech, “The view of markets is that the US will continue to benefit from the exorbitant privilege linked to the US dollar” to fund deficits. “But that may change. We can’t rule out changing the outlook” on US government debt. She later said, “No triple-A rating is forever.”
These twin announcements had the expected effect on the value of the US dollar, which dropped in value against other currencies about 1% Thursday afternoon.
Normally, when a currency declines like that, alternative safe haven assets rise in price. Gold and silver would typically experience higher demand and higher prices. However, rising precious metals prices would reinforce the decline of the US dollar. Therefore, the US government had a huge incentive to prevent gold and silver prices from rising.
That appears to be almost exactly what happened. Usually, when gold and silver prices are falling, the number of open contracts on the COMEX declines as traders sell off their long positions. Short buyers who purchase such contracts then close out their position.
In the past 48 hours, there has been a significant increase in the open interest, which is a sign that one or more parties, probably trading partners of the US government such as JPMorgan Chase and HSBC, have sold as many short contracts as it took to push down the prices of both metals. This has been a standard price manipulation tactic for several years, so I have little doubt it has been done again.
The plausible reason for the decline in gold and silver prices over the past 10 days is that the sharp increase in gold and silver prices at the end of 2010, especially late in December, is that there was a supply squeeze in COMEX inventories. Of total COMEX silver inventories, about 50 million ounces is currently registered, meaning that it is automatically available to cover delivery commitments of maturing contracts. That amount could be absorbed by fulfilling only 10,000 contracts. As I write this, there are 78,000 short contracts owed for March 2011 maturity.
There are extensive rumors flying that an unusually large number of December 2010 contracts were held for delivery of silver, which was not physically possible. Instead, many of them were supposedly settled for cash, often at a premium to “spot” price. This certainly would explain why the price of silver rose almost 50% in the last three months of 2010.
Apparently this tactic was so profitable for hedge funds and other deep-pockets investors that they are gearing up to repeat the process with the March 2011 silver contract on a much larger scale. At current prices, $1.5 billion could purchase the 10,000 contracts needed to deplete the entire stockpile of COMEX registered silver. The rumors are that these buyers are looking to jump in to make purchases during February and eventually force the price of silver up to about $45 before the end of March. Obviously, there are many hedge funds, private investors, and sovereign wealth funds that could raise enough cash to handle this raid on the COMEX silver market all alone.
However, you can be sure that the traders for banks that hold huge short positions (widely understood to be JPMorgan Chase and HSBC) are hearing of these plans. One defensive tactic to hold off the onslaught would be to dump a lot of paper contracts on the gold and silver markets to force down prices before the buyers start making their purchases in February. Then, when prices have fallen significantly, the short sellers could purchase lots of contracts and physical metal to help them fight back against the supply squeeze effort and also to discourage a planned raid on the COMEX inventories. Hence, you could expect a significant drop in gold and silver prices—right about now!
It doesn’t matter whether the second of these reasons is completely true or not, it is factual that the value of the US dollar is dropping. That should result in much higher gold and silver prices in the near future. I regard the current drop in precious metals prices as simply one more temporary buying opportunity.
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.
I would say precious metals are dropping because the economy is getting better. Although it’s been fun to watch them rise, Newton’s law of gravity must prevail eventually. And if the economic locomotive really begins to pick up steam later this year, gold and silver are in for a major price correction (down).
Richard,
You can use the analogy of Newton’s Law of Gravity to support your position, and I will use the analogy of Carnot’s 2nd Law of Thermodynamics to support mine: THERE’S NO FREE LUNCH!
You assume there are no repercussions for the Fed printing and spending money like drunken sailors. Only the obama media (and obama administration) is claiming the economy is getting better…those of us living in the real world ain’t buying it. Toss in oil prices going above $100/barrel and your hypothetical recovery is kaput. Personally, I wish you were correct…I really do, but OPEC allowing oil prices to escalate above $100/barrel and the Fed’s 24/7 printing operation will ensure that you are not. PMs are not on a bubble…the dollar is (along with our country’s credit rating).
-joe
Newton’s Law of Gravity on PM’s??? ROFL!!! XD Soooo, where was gold ten years ago at spot price? That’s $300/oz. Over the last decade, gold has gone up 475% compared to other investments such as S&P 500 (down 20%), and real estate (up only 23%). Gold is now edging closer towards $1,400/oz again. As far as silver is concerned, there is only a ten year supply left underground, not to mention 10,000+ applications used for it worldwide and even more brand new uses for it each year. This metal especially in particular will takeoff upwards. The economy is not getting better…the GDP numbers are lying to you. There is no “true growth” in the U.S. economy—its citizens are living a Disneyland fantasy on borrowed credit…LMAO!!! The United States’ creditors such as China and Japan will bitch slap the breakfast out of the U.S.’s mouth…American Dream = The World’s Biggest Joke…
http://www.youtube.com/watch?v=lnQzJs8q-qo
“That appears to be almost exactly what happened.”
On a scale of 1 to 10 just how exactly is that?
So the ex-President of Tunisia and his old lady fled the country after their government collapsed. Right before they left his wife went to the bank and get guess what she was after? 1.5 tons of GOLD. Not cash, CD’s or bonds, none of that… just GOLD.
If that ain’t something to think about I don’t know what is. Gold and Silver folks, you better get some physical while you still can.
Historically one ounce of gold can buy 15 barrels of oil,and whenever the price of oil changes direction ,the price of gold tries to catch up.this may take a few days or sometimes a few weeks ,depends on a few smaller factors like regional conflicts or technical problems but eventually they meet their equilibrium one way or the other.
@ Richard
How on earth can the economy be improving with a $16 Trillion debt ? Oh that’s right by printing more money (more debt).