By Patrick A. Heller November 02, 2009

I have heard several anecdotal stories reinforcing my belief that there is developing a huge shortage of physical gold and silver. Multiple sources have told me that owners of maturing commodity contracts who give notice that they want delivery are either getting very slow delivery or are being offered cash payments in lieu of metal at prices significantly above the spot prices.

In my mind, this reflects a looming risk of defaults in paper contracts for gold (and silver). Should this occur, “paper precious metals” may soon be worth a significant discount to physical goods. For now, most forms of physical gold and silver bullion-priced products are readily available at reasonable premiums. These reasonable premiums and ready availability could evaporate on short notice. If you need to add some precious metals to your holdings, I recommend doing so sooner rather than later – even this week.

Ever since the introduction of HR 1207, Rep. Ron Paul’s bill that calls for an audit of the Federal Reserve System that has 308 co-sponsors in the House of Representatives, Federal Reserve officials have tried a variety of tactics to prevent passage. As of this moment, they may have succeeded.

Such an audit, if it gains congressional approval, would almost certainly include auditing the U.S. government’s gold reserves and trading activities.

The Financial Services Committee began hearings on this bill in late September. Committee Chairman Barney Frank assigned it to the Domestic Monetary Policy and Technology Subcommittee. The subcommittee chair, Rep. Mel Watt, D-NC,, whose district includes the headquarters of Bank of America (the largest U.S. lender regulated by the Federal Reserve), has amended the bill, according to Rep. Paul, to eliminate “just about everything.”

A spokesman for Rep. Watt declined to comment on this development and explained that the congressman would not be available for interviews on this issue. Rep. Paul said he intends to introduce an amendment when the bill is being considered on the House floor to restore the bill’s original language. In light of the number of co-sponsors in the House, this might save the bill, at least until it gets to the Senate.

The Senate version is S. 604. It has only 30 co-sponsors, so Senate support of Rep. Paul’s legislation is not as strong as it is in the House. There is a competing bill in the Senate called the Federal Reserve Accountability Act, which was probably sponsored by Fed allies. This bill, S. 1803, could be maneuvered to displace H.R. 1207 should it be restored to its original language as it comes out of the House.

Last week, I stuck my neck out to make a short-term prediction. I explained that the recent pattern of gold trading in a week when options expired and the U.S. Treasury sold a large quantity of debt was for gold prices to be driven down until Thursday afternoon. Once the final Treasury auction closed on Thursday, I reasoned, the pattern was for gold to quickly climb back up to its pre-suppression levels. In my mind, I expected the price of gold to start climbing Thursday afternoon and get back to its level of a week earlier on Friday.

Making short-term predictions is fraught with danger, though the pattern in the past week has pretty much repeated the experience of recent months. The price of gold got all the way down to $1,023 at the low point last week. The price actually started to climb Thursday morning, rebounding all the way to $1,049 in Asian markets overnight. The gold market was poised to rise again Friday morning, but was sidetracked by investors worried by the significant drop in the U.S. stock market. The U.S. price closed about $1,040 that day.

On Nov. 2, however, the recovery finally got back up to levels I expected last Friday. The U.S. markets are still open as I write this, but gold has been over $1,060 several times today. I think there is a substantial prospect for gold to finally breech and hold the $1,070 level in the near term, maybe even this week. Once this occurs, it should be easy for the price to climb above $1,100.

CIT Group, Inc., filed for Chapter 11 bankruptcy reorganization on Nov. 1. One notable loser from this event is the U.S. taxpayer, with all $2.3 billion of the federal bailout money previously advanced to the company expected to be wiped out. CIT is not exactly a household name, but it provides financing to almost a million small- to medium-sized businesses. There are thousands of U.S. wholesalers and retailers who depend on CIT every year to finance their inventory for the Christmas selling season. This bankruptcy filing could jeopardize retail operations for the rest of 2009 and beyond.



Patrick A. Heller owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” the company’s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Financial Sense University (www.financialsense.com). His periodic radio interviews on WILS-1320 AM can be heard at http://www.amlansing.com, on the Korelin Economic Report at http://www.kereport.com, and on Coin Chat Radio at www.coinchatradio.com.

Above is a picture of Rep. Paul enjoying a casual moment with the author last month at the New Orleans Investment Conference.

More Resources:

• Ultimate Standard Catalog of World Coins 5-CD Set (1600-Present)

• 2010 U.S. Coin Digest, The Complete Guide to Current Market Values

• Standard Guide to Small-Size U.S. Paper Money, 1928 to Date