Gold rises despite obstacles

I have mentioned repeatedly that the price of gold serves effectively as a report card on the U.S. dollar, U.S. government, and U.S. economy.

For many people around the world, the choice for holding safe haven assets is between U.S. dollars and Treasury debt or gold (and, by association, silver). Estimates of how many dollars and how much U.S. Treasury debt is held by foreigners ranges from $12-$16 trillion. If the U.S. government is in trouble, or the U.S. economy is weak, foreigners tend to reduce their holding of dollars and increase their demand for gold.

The U.S. government is the world’s largest beneficiary of low gold and silver prices. When precious metals prices are low, foreigners are more content to hold dollars. This helps hold down the interest rate that the federal government pays on its debt. For every 1 percent decline in the interest rate that the U.S. government has to pay on $20 trillion in outstanding debt, that reduces the federal budget deficit by $200 billion per year. If the interest rates go up, that will also boost the size of the budget deficit.

Another benefit to the federal government of having foreigners hold massive quantities of U.S. dollars and Treasury debt is that America receives goods and services in return for exporting this paper. Should foreigners want to reduce their holding of dollars, then goods and services (and ownership in U.S. businesses and real estate) will be exported from the U.S. in return for the import of paper obligations. This would have the effect not only of increasing the federal budget deficit, it would also lower the standard of living for Americans.

On a random basis, there will always be fluctuating prices in precious metals and other asset classes. In my judgment, though, the long-term trading patterns indicate deliberate suppression of gold and silver prices. If accurate, who would be the primary beneficiary of such activity? To me it is clearly the U.S. government.

There are multiple reasons why I consider that the prices of gold and silver are being suppressed and that the U.S. government is ultimately behind such actions.

Legal authority: The U.S. government established the Exchange Stabilization Fund as part of the Gold Reserve Act enacted Jan. 31, 1934. The ESF was funded with $2 billion of the U.S. government’s $2.8 billion paper profit when it raised the price of gold from $20.67 to $35 per ounce. The original act authorized the ESF to deal in gold and foreign exchange to stabilize the value of the U.S. dollar. A modification of the law in 1970 allows the Secretary of the Treasury, with approval by the President, to use ESF assets to “deal in gold, foreign exchange, and other instruments of credit and securities.” Over the years, the U.S. government has admitted using ESF assets for manipulating financial markets other than gold.

Further, in response to the massive one-day decline in U.S. stock market prices (The Dow Jones Industrial Average fell 22.6 percent, for instance) on Oct. 19, 1987, President Ronald Reagan signed Executive Order 12631 on March 18, 1988, to establish the Working Group on Financial Markets, popularly called the Plunge Protection Team. The members of the Working Group are the Secretary of the Treasury, Federal Reserve Chair, Securities and Exchange Commission Chair, and Commodity Futures Trading Commission Chair.

The Working Group had three purposes – 1) enhance the integrity, efficiency, orderliness, and competitiveness of U.S. financial markets and maintain investor confidence, 2) consult with exchanges, clearinghouses, self-regulatory bodies, and major market participants to implement private sector support for the first purpose, and 3) to report to the President on the Working Group’s progress and, if appropriate, recommend any legislative changes.

The mechanism: The U.S. government does relatively little direct financial market manipulation. Instead, it almost certainly uses its 20 primary trading partners (major U.S. and foreign banks and brokerage firms) and allied central banks to execute the actual trades to effect gold and silver price suppression. The trading partners are not “required” to follow the orders of the U.S. government. However, they make commission income when executing such trades and, if they did not cooperate with the federal government, would lose their status as a trading partner (meaning the loss of that commission income).

Because these banks and brokerages conduct financial transactions for a wide clientele and even their own accounts, any transactions conducted on behalf of the U.S. government would tend to become lost in the shuffle and usually not be apparent as to who was behind the trades.

Further, these firms also know, from all of their clientele, the stop-loss points and other buy and sell limits accompanying prospective future trades, which can make it easier to precisely trigger a buying or selling surge for a particular asset.

In addition, the Bank for International Settlements has listed among its services the execution of swaps and other financial transactions that can be used to manipulate market prices.

The means: There are so many different ways that precious metals markets can be manipulated so as to possibly appear to be normal market reactions, that I cannot list them all. However, here are some examples:

• Executing trades during thin volume trading times, which magnifies their price impact.

• Entering large one-time sell orders that will tend to realize the lowest possible selling price, which is not the way that profit-maximizing sellers would disperse their holdings.

• Executing trades just before events happen that influence financial markets.

• Changing commodity market minimum margin requirements for leveraged transactions to force some long positions to be unexpectedly sold out.

• Propping up stock market prices, especially through trading in index futures, to draw attention away from precious metals.

The timing: There has been a multi-year, highly consistent pattern of times when gold and silver prices tend to decline. Again, not every example is listed below, but these will give you some idea of when to expect to see price dips:

• Right before U.S. financial reports are issued, such as the monthly jobs and unemployment report, the quarterly Gross Domestic Product data and the Consumer Price Index.

• Going into meetings of the Federal Open Market Committee.

• Before major politicians, such as the President, Treasury Secretary, or the Chair of the Federal Reserve give major addresses or testimony to Congress on matters related to the economy or financial markets.

• On the last trading days of each month, especially those that are the end of a calendar quarter.

• Before the beginning of major international financial conferences, such as those of the International Monetary Fund, World Bank, Bank for International Settlements, or meetings of the G-7 or G-20 groups of nations.

• On days when gold or silver options contracts expire on the New York COMEX or the London over-the-counter market.

• Just before, during, and right after holiday weekends, which also tend to be times of thin trading activity.

As of Tuesday this week, the price of gold reached a 10-month high and the U.S. Dollar Index reached a 31-month low. This was absolutely not supposed to happen. There were multiple events in the past week where the U.S. government would want gold and silver prices knocked down.

First, there was the Federal Reserve Bank of Kansas City annual meeting in Jackson Hole, Wyo., over this past weekend where Federal Reserve Chair Janet Yellen gave a major speech as well as Mario Draghi, the head of the European Central Bank.

Then, on Aug. 28, the COMEX September Silver Options expired as of the close of trading. To minimize the sudden demand for immediate delivery of physical silver from those holding call options at prices below the close, it was necessary for the U.S. government to try to at least make sure that the silver spot price closed on Monday below $17, and hopefully even lower than $16.75 or even $16.50.

To help make sure that prices were suppressed over this past weekend, there were multiple blatant actions that took place, all of which were ultimately unsuccessful:

On Aug. 22, in a two-minute period from 8:58-9:00 a.m. Eastern, a total of 23.85 million ounces of silver were sold short on the COMEX, an amount equal to about 2.5 percent of annual worldwide new silver mining output. Despite this massive dump, the silver spot price fell less than 1 percent as this happened. The Aug. 22 COMEX close for silver was only down 0.2 percent from the previous day.

The next major suppression attempt happened on Friday, Aug. 25. Unfortunately for the U.S. government, that day started off poorly with the release of the durable goods sales data for July, which were down 6.8 percent from June. That was the largest month-to-month decline since August 2014. When this news hit the market, the U.S. Dollar Index fell to its then-2017 low, and gold and silver jumped.

But right before Fed Chair Yellen was to give her speech in Jackson Hole, within a two-minute period, a single trader sold two million ounces of gold and another 50 million ounces of silver were sold short. These represent more than 2 percent and 5 percent of annual worldwide mine output for these metals, respectively. Such large sales had the desired effect of instantly pushing down the gold price 1.4 percent and silver 3.0 percent. But, to the dismay of the U.S. government, both prices quickly shot back up, closing on the COMEX that day about 0.5 percent higher than the prior day’s close.

Things went downhill for the U.S. government from there. Late on Aug. 25, North Korea launched three missiles. Two of them were described as in-flight failures. However, these so-called in-flight failures occurred at altitudes that would cause the most widespread damage from an electro-magnetic pulse weapon, which would be the most devastating way to attack economically advanced nations.

To compound the bad news, Hurricane Harvey struck the coast of Texas on short notice, flooding large parts of that state, including many ports and oil refineries. With the expected tighter oil supplies in the near term, gasoline prices should rise, which tends to support higher gold and silver prices.

The net result of the failed price suppression actions, the saber rattling by North Korea and the economic devastation of Hurricane Harvey pushed down the U.S. dollar on Tuesday, Aug. 29, to a new 2017 low and gold to a 10-month high. While silver did not reach a 2017 high, it shot up more than 2 percent from Friday’s COMEX close.

After U.S. financial markets closed on Aug. 28, North Korea launched another missile that passed over part of Japan.

Further price increases are not inevitable. If they occur, they will not happen in a straight line. Perhaps the next major points where major price-suppression tactics might be attempted will be on Friday, Sept. 1, going into the release of the monthly jobs and unemployment report and the Labor Day holiday weekend, and again on Wednesday, Sept. 20, at the conclusion of the next Federal Open Market Committee meeting.

Patrick A. Heller was the American Numismatic Association 2017 Exemplary Service and 2012 Harry Forman Numismatic Dealer of the Year Award winner. He was also honored by the Numismatic Literary Guild in 2017 and 2016 for the Best Dealer-Published Magazine/Newspaper and for Best Radio Report. He is the communications officer of Liberty Coin Service 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 http://www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday 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).

 

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