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Buy Metals at Bargain Prices
By Patrick A. Heller
September 27, 2011

From last Wednesday’s COMEX close into Asian market trading this Monday, the price of gold dropped more than 14 percent, its largest four-day price drop in the past 30 years. The price of silver tumbled more than 35 percent over the same period.

I am aware that gold and silver prices might fall by a noticeable percentage at any point, as that is an event that occurs from time to time. However, I was not looking for it to happen now and not to the extent that it occurred.

At any time it is a fair question to ask if gold and silver markets have peaked. Many customers are now asking me this question. Even more are asking me if these suddenly lower prices are a buying opportunity and if the bottoms have been reached. So, let’s look at these questions in terms of hard news and speculations about what might be going on.

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Last Wednesday, the Federal Open Market Committee made its announcement at the end of its regularly scheduled two-day meeting. The most significant detail in its statement was that the Federal Reserve would be replacing $400 billion of shorter maturity (up to 3 years) U.S. Treasury debt with the same quantity of longer term issues (6 to 30 years maturity). While this shift to longer maturities had been anticipated, the announcement of simply replacing total debt without inflating the money supply (also known as quantitative easing) took analysts and investors by surprise. In the absence of a formal announcement of further inflation of the money supply, investors became even more nervous about further declines in stock prices.

Last Thursday, the COMEX announced an increase in margin requirements for leveraged gold and silver accounts. Increases in margin requirements make sense as prices are rising, as that helps keep the market in order, but it does not make sense when prices are falling. At the time of the announcement, the price of gold was already down more than 6 percent from its early September high. Silver was then down 20 percent from its late April high. Consequently, the margin hike was not done to maintain orderly markets. Instead, it was a deliberate move to help knock down gold and silver prices.

As stock market prices fell Thursday and Friday, some of the technical signals turned more negative than when Lehman Brothers failed in 2008. This could have led to a panicked exodus from U.S. stocks into other assets such as precious metals and other commodities.

The decline of gold and silver prices late last week almost certainly scared some investors away from pulling their holdings out of U.S. stocks. This investor fear that a “safe haven” asset might not really be safe was reinforced by the overall decline in a large number of commodity prices.

In early September, gold leases up to three months maturity turned to negative interest rates. That meant that a party leasing gold would not only not be charged any interest, the lender would actually pay money to a party borrowing the gold. Late last week, the six-month gold lease rate also turned negative. At the beginning of last week, the interest rates on silver leases up to three months maturity also turned negative. These are not normal market conditions. Typically over the years, negative lease rates have been tied into efforts to suppress gold and silver prices by artificially forcing physical metal onto the market. This gives the appearance (though not necessarily the reality) that there is more supply of physical metal, which intimidates potential gold and silver investors.

Earlier this month, Deutsche Bank CEO Josef Ackermann said, “It is an open secret that numerous European banks would not survive having to revalue sovereign debt held on the banking books at market levels.” Several of the major banks are literally on the brink of collapse if they had to absorb losses on the government debt they hold. European central banks have to do something to contain this massive problem, but they have not been able to agree on which measures to take. I’m sure more hard news will emerge in the coming weeks as to what transpired over the past few days to knock down gold and silver prices. Without knowing just what further information will come out, let me now speculate on other possible events that contributed to the decline in precious metals prices.

First, it is entirely possible that European central banks of nations in the eurozone could be liquidating some of their gold reserves as a desperate move to beef up their fiat currency reserves to stave off default on their debts. If this is happening to any degree, that could help explain the why short-term gold and silver lease rates have recently turned negative.

Second, it is possible that the U.S. government may have informed the Chinese government in advance that is was preparing a major intervention to suppress gold and silver prices and asked the Chinese to refrain from jumping in to purchase physical metals until the market had been pushed near the bottom.

Last week a longtime reliable source told me that there were massive quantities of Asian buy orders placed in the London market to execute if spot prices dropped to $1,760 all the way down to $1,715. I have every reason to believe that at least a sizable percentage of these buy orders may be have placed by the Chinese government as this would be consistent with their trading activity since 2003. If the Chinese were alerted that they could have the opportunity to purchase gold even cheaper than their standing buy orders, it would be reasonable for them to cooperate by putting their buy orders prices in the $1,700s.

Third, it is possible that the U.S. government may have directly intervened in suppressing prices, through one or more agencies that are not drawing close scrutiny from Congress or the public. The prime suspect would be the Exchange Stabilization Fund, which was established in 1934. The ESF is an emergency reserve, not subject to congressional oversight, normally used to intervene (manipulate) in foreign exchange markets. In 1970, its mandate was changed by Congress to allow the Secretary of the Treasury, with the approval of the President, to use funds in the ESF to “deal in gold, foreign exchange and other instruments of credit and securities.” Thus, it would be possible and legal for the U.S. government to surreptitiously manipulate the gold market. The reason I consider this to be a plausible reason that gold and silver prices were suppressed is that the major beneficiaries of lower prices would be the U.S. government, its trading partners and allies.

On the basis of the hard information available early this week, it is highly likely that gold and silver prices were pushed down rather than fell as a result of free market trading. As I prepare this Tuesday morning, the price of gold is already up more than 7 percent from the bottom it touched in Asian markets early Monday, and silver is up more than 25 percent. Investor sentiment is not that volatile. You just don’t have gold and silver plummet then quickly rebound by such large amounts. However, manipulated markets can be that volatile.

The enormous global financial problems have not been cured in the past few days, so there is no reason to anticipate that gold and silver prices have peaked. However, I now think it will it will take a few months more for gold and silver prices to reach far higher levels than I had previously forecast.

What that means is that I regard the current gold and silver prices to be a temporary bargain buying opportunity. Because of the significant decline, it may even be worth accelerating purchases if you are normally one who purchases over time using the dollar cost-averaging approach.

As prices dipped toward the end of last week, we saw a significant increase in trading activity by both buyers and sellers. The action in gold has roughly balanced, while there has been much stronger demand by people to buy silver rather than liquidate. Because of the volatility in the market, wholesalers are effectively using two-tier spot prices where they are a buyer at one number and a seller at a higher spot price. With such strong demand for physical silver, it looks like delivery times for some forms are already slowing down.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at Other commentaries are available at CoinUpdate ( He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” ( His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at

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