Several financial events will come to pass next month, of which any one or more could trigger great volatility in gold and silver prices.
The Federal Open Market Committee (FOMC) regularly meets eight times a year. Their next meeting will be held November 1-2. For the past several years it has been a common pattern for precious metals prices to be knocked down right before and during these meetings. Several times in the past year, the announcement at the conclusion of this meeting has then led to a price spike upward.
The impact of the FOMC meeting will be overshadowed this time by the G-20 Group of Nations meeting coming up in Cannes, France November 3-4. This is the meeting at which German Chancellor Merkel and French President Sarkozy have promised that they will officially unveil their comprehensive plan to solve huge widespread financial problems affecting the 17 nations that use the Euro as their common currency.
If a genuine detailed resolution is proposed at this meeting, look for global financial markets to respond positively to the news. Unfortunately, I have not heard of any politicians thus far offering a serious plan to cure all of the problems. So what are the chances that this may come out of the G-20 meeting? In my mind, there is no chance at all.
I think it is most likely that no allegedly comprehensive solution will be proposed because the parties involved, especially Germany and France, are too far apart in their political stances. At best, there might be an announcement of some partial agreement. Don’t be surprised if the politicians try to pass this off as being comprehensive. I can easily see Eurozone governments promising that they have already come to an agreement on areas where there is no consensus, but masking the divide by trying to portray them as “details of the agreement that we are still trying to work out.”
This attempted claim of a comprehensive solution is not likely to fool many people. Should such an attempt occur, expect there to be almost continuous follow-up meetings of finance ministers and heads of state as they try to decide whether governments (meaning taxpayers), banks, or investors end up absorbing the hundreds of billions of dollars in bad debt losses. At the same time, expect that investors will assume the worst and trash the values of European government debt and the stock values of major European and US banks. This development could trigger a global financial crisis on a scale never before seen. If this scenario comes to pass, gold and silver prices could soar.
A less likely scenario for the G-20 meeting would be that it quickly becomes obvious that the global financial system is an incurable mess, in which case the collapse of the worldwide economy would occur more quickly.
By the way, it has been a typical pattern that precious metals prices have declined just ahead of G-20 meetings, with prices rising once the meeting is over.
While the G-20 meeting is wrapping up on November 4, the US Bureau of Labor Statistics will release its monthly jobs and unemployment report at 8:30 AM that day. Over the past five years, the gold and silver prices have been pushed down in advance of the release of this data, with prices recovering afterward. The various data I have heard from multiple sources thus far is that the jobs and unemployment report this time around could be one of the most positive in the past few years. Unfortunately, even if this news is good, I don’t think it will be enough to offset the horrible backlash to the G-20 meeting.
Should worldwide financial markets hold together through next week’s developments, they next key date to watch would be November 22. On that day, the COMEX December 2011 gold and silver options would expire. If precious metals prices are high on the expiration date, that would encourage more investors to exercise their call options to demand delivery of the physical metals, leading to an even tighter supply squeeze than the market it now experiencing. Normally, the volume of December contracts is larger than for those of other calendar months, so the US government has a strong incentive to suppress gold and silver prices on November 22. The lower the spot prices, the fewer call options that would be “in the money” and be worth exercising.
I do not currently have a sense of whether to anticipate a supply squeeze at the options expiration. There have been tricks played in the past to reduce the impact, the most common and consistent being the manipulation downward of gold and silver prices. So, I wouldn’t be surprised to see this scenario play out one more time.
November 23 is the deadline for the report from the special Congressional committee appointed to identify $1.5 trillion of spending cuts over the next ten years. Should this committee fail to come up with any plan, the default provisions automatically take effect. These annual savings are barely 3% of the fiscal 2010 federal budget deficit, if calculated by proper accrual accounting rather than misleading cash flow accounting used in Washington. Still, the politicians are pretending that getting the report is a critical development. If the default provisions kick in because the committee does not reach any consensus, expect greater turmoil in the financial markets.
The first day of notice for the COMEX December 2011 gold and silver futures contracts comes up November 30. Most COMEX futures contracts are never intended to result in the physical delivery of the underlying commodity. Investors are trading a paper contract as a convenient means of taking a long or short position in a specific commodity. Owners of long or short contracts mostly sell off their holdings or buy offsetting positions to cancel out the need for physical delivery.
However, if a contract holder does not want to take physical delivery of a maturing contract, they need sell off their position before the first day of notice. In theory, long contracts still owned on the first day of notice are standing for delivery of the physical commodity from the short seller of the particular contract.
Maturing December contracts held for delivery are required to be delivered before the end of December. Short sellers have an incentive to make prompt delivery because that minimizes their storage and insurance charges. Those who do not deliver quickly often do not have the physical commodity to fulfill their contractual obligations. If there are too many “naked” short sellers of gold and silver, a major scramble to find physical metal could ensue. This occurred in March 1998 when Warren Buffet’s Berkshire Hathaway stood for delivery of its entire 129.7 million ounce silver purchase, where the price of silver rose more than 25% in one month. There was a mini-jump in the price of silver with the maturity of the March 2011 contracts. If a shortage of COMEX bonded warehouse gold or silver develops with the maturity of the December 2011 contracts, prices could rise once again. (Note: COMEX contracts can be settled for cash or other alternatives. Many March 2011 silver futures contracts were settled for cash at prices as much as 30% above the prevailing spot price!)
At the minimum, I would expect gold and silver prices to be volatile during November. In fact, the higher volatility might just have begun today. It is entirely possible that prices at the end of the month could be much higher at the end of next month than they are today.
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.