In my last column, I described the prospects for a major news development sometime during the month of September. Rumors of such an event have been floating around precious metals circles for a few months, with some calling the anticipated event the “September Surprise.”
In my essay, I listed nine possible events that could occur, any of which would be significant enough to serve as the September Surprise.
On Tuesday, September 21, the Federal Reserve’s Open Market Committee (FOMC) met. The statement issued at the end of the meeting, in plain language, states that the FOMC now realizes that the economy is slowing in recent months.
Further, the FOMC stated that they consider inflation to be too low! Their exact words:
Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.
Supposedly, the FOMC is relying on US Bureau of Labor Statistics for the consumer price index, excluding unimportant data such as food and energy costs, which officially show an increase of only 0.9% from August 2009 to August 2010.
What the FOMC is specifically ignoring is the actual rate of price increases. The Bureau of Labor Statistics regularly tinkers with its methodology, with the invariable result of showing lower increases in price levels. John Williams, who publishes his research at http://www.shadowstats.com, has computed the consumer price index using the methodology of the US Bureau of Labor Statistics in 1990 and in 1980. By his calculations, consumer prices are up about 8% in the past year.
The FOMC statement further reads, “The Committee will also maintain its existing policy of reinvesting principal payments from its securities holdings.” This refers to the practice of taking collections on mortgages by Fannie Mae and Freddie Mac and using these proceeds to increase the US money supply through the purchase of US Treasury debt.
The Fed has now openly stated that it will inflate the money supply and work toward achieving higher increases in consumer prices under the claim that this will somehow lead to price stability. Huh!
During COMEX markets on September 21, both gold and silver prices were clobbered, with gold dropping a few dollars from the previous day’s close and silver falling all the way from the prior close of $20.78 down to a low of $20.49. This is the standard operating procedure for times when the US government wants to be perceived as doing a competent job of managing the economy.
This time, that strategy backfired. Upon the release of the FOMC announcement, gold jumped to record high levels and silver climbed as high as $21.07.
In plain language, the FOMC statement reveals the plan of the US government to drive down the value of the US dollar. It tried to mask the impact of that statement by referring to the long-term, but investors around the globe weren’t fooled.
Although the Federal Open Market Committee announcement was not listed in my last column as one of the possible scenarios for a September Surprise, there is a strong likelihood that this could be this event that some analysts have anticipated. We will only know for sure later as the US dollar declines in value (it fell more than 1% upon release of the FOMC statement) and gold and silver prices start rising more sharply.
Most people don’t yet realize that the tightness of supply versus growing demand has put the gold and silver markets on the brink of accelerating price increases. Now that the Federal government has admitted that it will be driving down the value of the US dollar, don’t be surprised if we soon see days where the price of gold jumps more than $50 and silver climbs by at least a dollar.
An interesting side note to the deterioration of the US economy and decline in the value of the US dollar is the growing number of important federal economic officials who are quitting their jobs. On September 21, Larry Summers, a former Treasury Secretary under President Clinton and now head of the National Economic Council, announced he will be returning to Harvard University at the end of the year. This follows the resignations of Christina Romer (who had been chair of the Council of Economic Advisers) and Peter Orszag (who served as the budget chief). Don’t be surprised if more officials, including possibly Fed Chair Ben Bernanke and Treasury Secretary Tim Geithner, leave their federal posts before the economic news gets much worse.
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 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.