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Gold price swings ‘predictable’

Last week, I discussed two new developments in the numismatic and precious metals markets. I did not discuss the action of the precious metals prices before and after the Federal Open Market Committee post-meeting announcements last Wednesday afternoon. What happened then matched what has consistently occurred over the past six years.  Therefore, it was not a new market development.

Beginning on Friday, the ability to rig prices on the gold market in London will become far more difficult.

Greek debt is rattling the financial market, driving up the price of gold.

In markets that are manipulated, short-term traders can take advantage of regular patterns. For the past six years, at least 95 percent of the time the prices of gold and silver have been weak heading into the two-day FOMC meetings. Once the announcement is made Wednesday afternoon at the conclusion of the FOMC meeting, gold and silver prices then partially or fully recover. That is exactly what happened once again last week.

The further rise in gold and silver prices last Friday was not part of this typical pattern related to FOMC meetings. This is not due to the new method of establishing the London gold prices that started that day, as many people might expect.  Rather, the renewed concerns about Greek debt rattled financial markets.

There is no practical way that the Greek government’s debts will ever be fully repaid. None of the political posturing by the Greek government or the European Central Bank will change that reality. Yet the ECB continues to loan even more funds to the Greeks to buy a little more time.

Why would they do this? Simple.  Many central and large private banks are holding Greek government debt as assets valued at full face value. As long as the politicians keep pretending that somehow this debt will be repaid, these banks won’t have to collectively absorb on their income statements tens to hundreds of billions of dollars of bad debts.

Once these bad debts would be recognized, several of the privately owned banks would be insolvent or at least not meeting the “stress test” requirements. This development would trigger derivative contract liabilities, which would not necessarily be paid in a timely manner.

Facing up to the reality of the inability of the Greek government to ever repay its debt in full could trigger a domino effect of collapsing central and major private U.S. and European banks. Politicians know that if they allow this to come to pass, their political careers are pretty much over. Therefore, they will continue to push the problem further into the future as long as possible by continuing to loan Greece even more money that will never be repaid.

The new method of determining the London gold price beginning last Friday was pretty much a non-event. Only two more direct participants (Goldman Sachs and the Swiss bank UBS) joined the four banks that formerly determined the London gold fix. None of the three Chinese banks who were qualified to become direct participants elected to do so at this time. This choice to abstain makes a lot of sense. The Chinese are aggressively acquiring gold, but do not want to be perceived as doing so as that would tend to lead to higher prices.  Therefore, they have a financial incentive to make their purchases through third parties rather than by direct bidding in the London gold auctions.

There was a story reported in multiple newspapers in northeastern Africa over the weekend claiming that the Ethiopian air force had made two bombing runs on the Bisha mining operations in Eritrea last Friday. The stories emphasized that this mine was the major source of exports from that tiny nation and that the exports were gold.

The Bisha mine is 60 percent owned by Vancouver, Canada-based Nevsun Resources Ltd. Nevsun issued a news release Sunday providing an update on operations at the Bisha mine. According to their news release (available at   http://www.nevsun.com/news/2015/march22/) this mine ceased mining operations more than a week earlier because the ball mill gearbox failed. Replacement of the gear box’s bearings is nearly complete. The company expects to resume operations later this week.

The company stated that there was an act of vandalism during the night shift this past Friday, which led to spillage of water into the processing plant. No injuries were reported. The cleanup and repairs were done quickly and will not delay the restart of mining operations. The company further declared that the Bisha mine is a primary copper mine, one of the highest grade open pit copper mines in the world. Although not stated, the gold output would be a by-product of the copper mining activity rather than the main economic driver of operations.

In sum, the alleged bombing of the Bisha mine appears to be another fake news story.

Now that the London gold price-setting process has changed, I look for, at the minimum, a gradual increase in gold and silver prices. I expect this to occur without regard to the impact of any other financial turmoil. However, I do anticipate a number of other economic crises that will likely push up precious metals prices over the coming year or so. Stay tuned for further developments.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and 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. Other commentaries are available at Coin Week (http://www.coinweek.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). His Numismatic Literary Guild award-winning 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 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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