After reviewing some fresh developments, I think there is more than a 50% probability that gold will surpass $2,000 by the end of September. Here are some of my most recent thoughts.
Germany has been plundered for hundreds of billions of Euros to bail out the weak nations in the Euro sphere. Between the German courts and the legislature, there is a good prospect that by the end of September one of them will declare that the massive amount of bailouts violate the German constitution.
Germany is the economic powerhouse of the Euro sphere. Should that nation take steps to leave the Euro zone, it would be sufficient to just about destroy that currency. Any hints that the Germans are considering even some limitations on their support for other nations will send investors into a frenzy to get out of the Euro and into other assets, such as the US dollar, gold, and silver.
Should the US government persuade the COMEX to try to hold down gold prices through a series of increases in margin requirements, as it did in the silver market in May, that would backfire. What would happen is that investors would switch from gold to silver. The margin requirements for silver were pushed so high in May that no more would be likely until the price of silver soared past $50.
The US Dollar Index closed Monday at 73.68. Any close on a Friday below 73.70 would be a technical signal for a quick sharp decline in the value of the US dollar. Gold and silver would certainly be an alternative asset sought by investors getting out of the dollar and dollar-denominated paper assets.
Look for the politicians in Washington to propose a national sales or value added tax, perhaps for about 5%. This has been gathering behind the scenes support for at least a few months. It might even be included in President Obama’s address next week. The threat of the adoption of any such tax would further devastate already-slumping consumption. Jobs and production make consumption possible, so these are what need to be stimulated in order to increase prosperity. Still, it is curious that many politicians like to talk about rising consumer demand as somehow being responsible for the creation of jobs and production—and many of these very same politicians are now threatening to crimp consumer demand!
At the minimum, the politicians are getting closer to admitting that another round of quantitative easing (i.e. inflation of the money supply) is imminent. Since QE2 was announced the day after the November 2010 elections, the US dollar has lost more than 35% of its value compared to gold and silver! What would the next round do?
Demand for physical gold in India, China, and Vietnam continues to soar. The first two countries are the world’s largest gold consuming nations, while Vietnam is also close to the top of the list. Obviously, it will take much higher prices to discourage this demand.
Finally, prices of gold mining stocks have been incredibly strong over the past couple of weeks. On a relative value basis, shares of many gold mines (and silver mining companies) look very attractive—as I am told by people whose judgment I value. The money pouring into these shares can be considered part of the growing overall demand for physical gold. I am not an expert in this market niche, so I cannot give you an in depth discussion of the technical trading signals of gold stocks. I certainly cannot speak knowledgeably about the relative pluses and minuses of particular companies.
If gold can reach $2,000, I also would expect to see silver top $50 as well. There are no major gold or silver commodity options or contract expirations until the December maturities hit in late November. With such a relatively clear path that would not be sabotaged by price suppression tactics as such contracts mature, we could see a very interesting next few months.
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.