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Gold Price Suppression Efforts Weakening
 | By Patrick A. Heller, Market Update
August 03, 2009 |
Last week was a perfect example of the efforts by the U.S. government and its central bank and private trading partners to manipulate the price of gold downward.
From the perspective of the U.S. government, several events occurred where there was a need for the U.S. dollar to appear strong and, consequently, for the price of gold to look weak. First, the U.S. government had over $200 billion of debt to sell, one of the largest weekly totals in history. Second, about 150 Chinese government officials came to Washington, D.C., for meetings on Tuesday and Wednesday. You can be sure that the Chinese were looking for reassurance that all of the U.S. dollars and U.S. Treasury debt in their central bank reserves would hold their value. The U.S., on its side, would be looking for confirmation that the Chinese would continue purchasing U.S. Treasury debt and even increase their support of the dollar. Third, commodity options expired on Tuesday. A lower gold price would mean that fewer options contracts would be tendered for immediate delivery of physical metal.
Gold prices held steady through the close of the COMEX on Monday. In the ACCESS aftermarket, however, gold started to fall even though there was no news to explain the move. Right on cue, the COMEX close on Tuesday dropped about $14 from Monday's close. Then it fell about $12 more for Wednesday's close.
After the major pressure to hold down gold prices had ended on Wednesday, gold recovered a bit on Thursday. On Friday, the price soared almost $20 and closed almost exactly where it was at the COMEX close on Monday! Early spot prices this week were even higher.
There are significant implications that can be drawn from last week's trading activity. For the past couple of years, concerted efforts to suppress the gold price have typically driven down prices 5 to 10 percent. Then it usually took at least one to two weeks to recover from the drop. Last week, the price fell less than 3 percent, and then completely recovered within 48 hours! To me, that is a clear sign that the gold price suppression efforts are weakening.
By the way, the temporary drop in gold and silver prices encouraged a lot of savvy buyers to make a purchase. On Wednesday, my own company enjoyed one of its top ten sales volume days since the 1979-1980 bullion boom!
Other items:
Last week, the news spread throughout the coin industry that National Gold Exchange, Inc. (NGE) had filed for Chapter 11 bankruptcy on July 24. NGE was one of the largest coin wholesalers in the country, with three buying offices in Europe. A number of other coin firms are owed five-, six-, and seven-figure amounts by NGE, which are likely to be settled for just pennies on the dollar. My own firm had done substantial trading with NGE over the past 20 years, but had ceased doing so several months ago when that company's operations showed signs of financial stress.
Other than losses absorbed by some coin dealers and banks, I doubt the NGE bankruptcy will ultimately have much effect on the industry. There are multiple other coin wholesalers who have offices or contacts in Europe, so the supply of coins coming back to America should hold steady.
One operation that might be at risk is the Independent Coin Grading Company (ICG). ICG is owned either by NGE or the owners of NGE. Should ICG close, the value of their third-party certification will fall sharply. This is a good time to remind collectors that they should always "buy the coin, not the holder." If you own a solid quality coin, being in the holder of a defunct grading service will not hurt the coin's value. If the coin is of marginal quality or worse, all the words on the holder will be meaningless.
At the dinner after the end of the meetings with Chinese officials last Wednesday, U.S. Treasury Secretary Timothy Geithner spoke. At one point, he stated that Americans were going to have to tighten their belts and once again learn how to live within their means. If you need an English translation, here is what he really was saying, "The Chinese did not agree to continue funding the U.S. government's budget deficits to the degree we want. Hard times lie ahead."
On Friday, the U.S. Dollar Index fell to settle at 78.34, which was below the June low. This is a sign to technical traders that the U.S. dollar is likely to quickly fall further. Should the dollar continue to drop, the price of gold is bound to rise.
On Friday, GFMS, Ltd. released its report of the worldwide volume of scrap gold in the second quarter of 2009, which declined 40 percent from the first quarter. The temporarily high scrap gold liquidation in the first quarter was being touted by some so-called experts as a reason to expect weakness in gold prices in the second quarter. Much of the increase in gold scrap sales came from India when prices were in the high $900s to more than $1,000. As soon as prices fell well below those levels, the export of gold scrap from India instantly halted. In mid-April I told customers about the fall off of scrap sales, but the mainstream business press didn't hear about it until the end of July.
The American Numismatic Association World's Fair of Money will be held this week at the Los Angeles Convention Center. My expectation for the show is that most dealers will buy cautiously, focusing on filling customer want lists rather than stepping out to add nice coins to their inventory for hoped-for future demand. I anticipate a huge increase in demand for blue chip U.S. coins like Mint State classic U.S. gold coins, Morgan and Peace dollars, and the like within two months. In a few months, I think there will be a lot of dealers kicking themselves for not buying more aggressively at the ANA show.
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