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Sagging economy, rising gold

Heller0509Late last week, the price of gold reached a five-month high going into a holiday weekend (most U.S. markets were closed last Friday while many European markets were closed this Monday).

Holiday weekends are a prime opportunity for the U.S. government through use of the Exchange Stabilization Fund, and actions by its primary trading partners and allied central banks to suppress precious metals prices (and also prop up stock prices). Why would the federal government have an incentive to manipulate such prices?

First, if the public perceives that the economy is chugging along better than it really is, that helps the U.S. government pay a lower interest rate on its nearly $20 trillion in debt.

Second, the prices of gold and silver are effectively report cards on the state of the U.S. economy, U.S. dollar, and U.S. government. As gold and silver prices rise, that shakes public confidence in the economy, dollar and federal government. There are a variety of reasons that precious metals prices have trended upward this year.

For instance, there are multiple recent indicators that the U.S. economy is not doing well. When such data is covered, it tends to be individual reports not tied into the bigger overall picture. Here is just as sample:

• The latest Non-Farm Payrolls Report, even before subtracting for the revision to prior month reports and backing out the double counting of new jobs using the birth/death adjustment, was far lower than needed to keep the unemployment rate from rising. The headline of +98,000 jobs is nowhere near the additional 125,000 to 150,000 jobs per month required (because of the nation’s rising population) to avoid an increase in the unemployment rate. This was one of the lowest monthly job increases over the past several years.

• March new car sales declined for the third consecutive month, falling even more than the increase in truck and SUV sales. The National Automobile Dealers Association used car price index in February was down 8 percent from a year earlier.

• U.S. housing starts in March declined a seasonally adjusted 6.8 percent from February levels.

• The Producer Price Index for final demand reflected prices 2.3 percent higher in February than year earlier levels. This wholesale data is often comparable to the Consumer Price Index. The Federal Open Market Committee has for years complained that consumer prices were not rising at least 2 percent per year, which was a key reason the FOMC has been slow in raising the federal funds interest rate.

• The Gallup Poll of U.S. Consumer Spending is showing that consumer spending is rising much greater than 2 percent annually. In March 2017, consumers were spending an average of $100 per day compared to an average of $89 per day in March 2016.

This is not a comprehensive picture of the American economy. But, when you put all of these tidbits together, things are not necessarily looking that good. To me, this is the bedrock reason that gold and silver prices are up strongly thus far in 2017, and destined to rise higher in the coming months.

Toward the end of last week, the price of gold rose to $1,291, which was its 200-day moving average price. This would set off a signal to technical traders that it was time to start purchasing gold, a move that would further push up the price.

Because of the alarm of gold reaching $1,291 Thursday last week, I expected to see a massive effort to suppress gold and silver prices during the normally thin trading around holiday weekends. That is exactly what happened.

Early this week $3 billion of paper gold contracts were sold short in an effort to knock the price of gold down. In my thinking, if they could not get it below $1,275, they would not succeed.

This attack on the price of gold failed. Gold only dipped down to about $1,279 on Tuesday, then quickly recovered to close higher on the COMEX from Monday’s close.

If this amount of market manipulation cannot push down the price of gold very much and only for a couple of hours, that is a sign that prices should be higher in the near future.

The one caution is that the price suppression in the silver market did temporarily succeed. I figured that the price would have to fall from above $18.60 to below $18.40 to have an effect. This attack in the much smaller silver market drove the price briefly down below $18. By mid-week the price had recovered only part way to where it ended last week. Although the partial quick recovery in silver’s price points to eventual higher precious metals prices, the process may take a bit longer than people might expect if they were only looking at the gold market.

By the way, in order to try to suppress silver prices over the past few weeks, massive quantities of short contracts have been sold on the COMEX. Early this week, total open positions (which is one long position offset by one short position) exceeded 1.135 billion ounces, well above last year’s record for the highest ever open position. The open position on the COMEX silver market has soared from about 800 million ounces just a few months ago.

With financial statistics such as I highlighted above, the downturn in the U.S. economy may be accelerating. One consequence of this development is that it increases the prospect of higher precious metals prices sooner rather than later.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He was also honored by the Numismatic Literary Guild in 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).

 

This article was originally printed in Numismatic News. >> Subscribe today.

 

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