The Federal Reserve issued a news release on May 9 to announce its participation in the intended rescue package to keep Greece’s government debt from becoming worthless. In essence, the Federal Reserve stated that it was willing to supply an unlimited quantity of US dollars for short-term funding to the European Central Bank, the Bank of England, and the Swiss National Bank. In addition, the Fed would provide up to $30 billion to the Bank of Canada.
When such a major announcement is made, the US government has an incentive to make sure the markets react in the intended direction. Unfortunately, when the Federal Reserve announced that it was willing to flood the world with US dollars, the prices of gold and silver dipped for only one day, before it was off to the races. By May 12, the spot price of gold set an all-time record high (ignoring inflation). The same day the price of silver closed in US markets 6.5% higher than it settled the previous Friday.
It took a while for the dollars to be distributed around the globe. If you look back at the price trends in May, you’ll see that it took almost two weeks for the various central banks to funnel the dollars to their trading partners so that they, in turn, could afford to sell more naked short contracts for gold and silver.
However, the threat of higher inflation caused by the increase in the money supply has now overcome this latest round of price suppression. For several months, the money supply has actually been falling as a result of lesser economic activity. I suspect that this latest flood of US dollars may temporarily turn around that decline.
For those of you who enjoyed my columns last week, one reader reminded me to provide the links to directly view the open options contracts on the COMEX. For gold, go to http://www.cmegroup.com/trading/metals/precious/gold_quotes_settlements_options.html. For silver, the link is http://www.cmegroup.com/trading/metals/precious/silver_quotes_settlements_options.html. When you check either table, refer to the far right column to identify the quantity of open contracts. Gold contracts are for 100 ounces and silver contracts are for 5,000 ounces of metal.
The most important figure is the net number of contracts between the calls (options to purchase at the contract price) which are listed first and the puts (options to sell at the contract price) which come at the end. As an example, at the close on May 28, there were 4,537 open call options at a strike price of $1,270.00 versus only 53 puts. The net demand is 4,484 contracts which represent 444,840 ounces of potential demand for physical gold. In the silver market, there were 2,571 calls at $19.00 against only 266 puts. The net demand of 2,295 contracts could lead to a potential demand for 11,475,000 ounces of physical silver. However, the price of silver would have to be enough over $19.00 at the time of the July 2010 contract expiration in late June to be worth the cost to exercise the contracts.
There are rumors circulating that, if they have any substance, could soon have a serious impact on precious metals. One is that Interpol has been conducting a significant investigation in the US, Europe, and other nations of the financial goings-on over the past three years. Supposedly, they are prepared to press charges in either June or July against a huge number of top-level people in the banking and brokerage businesses, as well as major politicians and government regulators. Should there be any truth to this rumor, even if on a smaller scale, expect the value of many world currencies to fall—leading to soaring precious metals prices.
The US Mint just reported that last month’s sales of 1 Oz Gold American Eagles was the highest for any month since January 1999!
According to the Financial Times, the new coalition government in the United Kingdom is expected to announce huge increase in that nation’s Capital Gains Tax (CGT) to be effective June 22. Speculation is that the current 18% tax rate could rise to 40% or even 50%. Britain’s Revenue and Customs office has announced that British Sovereigns minted in 1837 and later years and Britannia gold coins are exempt from the CGT because they are considered currency in the United Kingdom. Other gold coins that are not considered currency in Britain, such as the South Africa Krugerrand, would be subject to the CGT.
As you might suspect, demand for Sovereigns and Britannias has soared in Britain. Premiums have more than doubled from where they were a month ago—if buyers are lucky enough to find them. As the shortage of physical gold in Europe grows more extreme, the days when it will be tough to buy precious metals in the US draw ever nearer.
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 periodic radio interviews can be heard on WILS 1320 AM in Lansing, www.talkLansing.net, and on www.yourcontrarian.com.