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.
Dave says
August 31, 2011 at 2:08 pmMeasuring the strength of the dollar by comparing it to gold or silver is as ridiculous as using the price of oil to measure the dollar’s strength. Like any commodity, the price of gold (& silver) is determined by supply and demand. As you acknowledge, “Demand for physical gold in India, China, and Vietnam continues to soar.” Without a similar drop in demand elsewhere, the price of gold expected to soar commensurately.
Secondly, I don’t share your cynicism that changes in margin requirements are an attempt to control prices. Margin requirements will increase if either the price or volatility of a commodity increases significantly; after all, the margin is there to insulate against price swings. April’s margin increase came after silver nearly doubled in price over a 3 month period.
Finally, one option available to the fed is to stop paying interest on reserves. That would spur the banks to either loan out or invest excess reserves. I don’t know if that would qualify as Quantitative Easing, but it is worth trying regardless of any attached labels.
Jeremy says
August 31, 2011 at 7:06 pmDave, why don’t you begin your own blog instead of tainting other’s with illogical, ignorant misinformation? I think the majority of us who understand the current economic and geopolitical environments have had enough of the attempts to mislead others. You didn’t even bother to provide any facts, which is because none exist to back up any of the ridiculous gibberish in that comment.
David M. Lewis says
September 1, 2011 at 5:10 amlol @ Dave
r u srs?
haha
That’s fine…because…y’know…all that silver/gold/palladium/platinum you’re NOT buying?…well, um…that’s more for the rest of us who ARE buying. Next time, type us up a ten-page essay on more of your views and opinions because it’s wasted time and effort falling on deaf ears. We’re still going to buy, and we’re still holding long. Good game, bro…good game.
William says
September 1, 2011 at 7:53 amalthough I don’t totally agree with him, Dave makes logical points so no need to give him a hard time.
One point regarding margin increases. I find it funny that it’s been raised so many times for the metals, but I can’t recall it ever been raised for internet stocks during the boom. Either that’s selective memory on my part or incontrevertible proof of manipulated price controls…..
Dave says
September 1, 2011 at 12:19 pm@David Lewis – Before you deride another’s post, you should actually read what was posted; otherwise you just look foolish. At no point did I comment on my investments, nor did I make any predictions on where the value of gold (or silver) is heading, nor did I make recommendations whether one should invest in precious metals.
@William – Thank you.
With regards to margin requirements, the Federal Reserve sets minimum requirements for equities, which are currently 50% for new positions and 33% for maintenance. Brokerages can set higher values or set additional requirements. Since it is a percentage, your actual dollar value will be higher for more valuable equities.
By contrast, exchanges set the the margins for commodity futures contracts, and these are set at dollar values, not a percentage of contract value. For silver, it is $21.6k for new contracts and $16k for maintenance. One silver contract (5000ozt) at $20/ozt is worth $100K. A 4% change in price is a $4K change in the value of the contract. At $50/ozt, that same 4% change is $10k. According to the CME, margin requirements are based on volatility. If volatility increases (even in the absence of an overall price change) margin requirements will increase to cover the new volatility.
There is a two page paper entitled “Silver and the Margin of Safety” at (http://www.cmegroup.com/education/files/PM167-silver_margin-of-safety.pdf) that discusses a some of the reasoning for silver’s margin increases last May.
John Kennedy says
September 3, 2011 at 10:51 pmIf we disagree with Dave, let’s criticize what he writes rather than criticizing him.
@Dave: If the margin increases are to prevent volatility, how come you don’t see them after price declines, as well as advances? And clearly the margin increases on Ag were the cause of the volatility in May. And don’t you think the timing of the increases is a little suspect? Expiration months, for example.
I, too, was taught to trust the government and its institutions. But the evidence is very strong that the banks, the Fed, the CME, the Treasury, and foreign governments willfully manipulate (or try anyhow) prices. Commodity prices, bond prices, equity prices, and more. See GATA.org for examples.
Why is it “worth a try” for the Fed to “spurr the banks to loan money”? What do you have against free markets? And don’t you think all the spurring between 1995-2005 caused enough damage to our economy?
Finally, you are correct that supply and demand do (at least in free markets) determine the value of commodities such as Ag and Au. But supply and demand also determine the value of fiat money (again in free markets). You choose to benchmark everything against the fiat. Some of us, such as the author and I, choose to benchmark against Gold. To us, Gold is money.
If you want to understand money and credit, is is well explained in a book written in 1912: The Theory of Money and Credit, by Ludwig von Mises.
David M. Lewis says
September 4, 2011 at 10:04 pmSomehow, the Keynesians/Chicagoans hijacked and sabotaged the financial system to put floating fiat in-place. They put the [precious metal standard] on inactive stasis while they use the borrow-and-spend mentality to prop-and-shave until the Power Elite re-allocate the wealth of the nation or of the world. It’s like how a disposable multi-blade razor works: the first blades prop-up a hair while the last blades shave it off. This is also implemented in shorting. They’re stealing some of our money and pocketing their winnings. It’s a straight-up re-allocation and re-distribution of wealth; wash, rinse, repeat. The Power Elite can, then, re-exchange the floating fiat with valuable precious metals. That’s how you steal – elitist style. The Austrians are fighting to put the original Constitution, true free market, and the precious metal standard back into place. This is the battle we’re currently in. The Power Elite are wreaking their havoc all over the place, but people are slowly waking up. Time flows like a river; history repeats itself. There is also some backfire as the population the Power Elite put into unemployment now have the time to research online and learn about the truth. The people they were trying to destroy may eventually destroy them in return. They still have the wealth, though, so much damage has already been done. One of the only ways to win it back and re-distribute it to the people would be to perform a French Revolution style guillotine-beheading of the aristocrats. Technology is the liberator unless the Power Elite control technology. It really comes down to being a race on who gets there first. You can define what “there” means.