As I write this Monday morning, the price of gold is up about $80 (6.7 percent) and silver soared $2.10 (13.4 percent) since the end of last year. If this news were for any other financial asset, it would get banner headlines.
Most of the price increase occurred last week, in response to multiple developments. Of these developments, only the Jan. 15 announcement by the Swiss National Bank of ending the tie of the Swiss franc to the value of the euro received much press in America. Of the three developments, this is the least significant.
This move was expected, though not necessarily before a forthcoming major Jan. 20 announcement from the European Central Bank (ECB). The economies of the Eurozone nations have, as a group, been hurting much worse than Switzerland. The relative value of the euro to the U.S. dollar reached a nine-year low. Since the Swiss National Bank had pegged its franc last year to be equal to the value of 1.2 euros, that also knocked down the Swiss currency.
As recently as early last week, the Swiss National Bank issued assurances that it would maintain the peg to the euro indefinitely.
Upon this announcement, the value of the Swiss franc to the euro immediately jumped almost 30 percent, settling that day about 15 percent higher than against the euro. The euro itself, dropped an average of about 3 percent that day against other world currencies. The move caught most foreign exchange traders by surprise. It has been reported that Citigroup, for instance, took a loss of about $150 million on these foreign exchange moves.
On Jan. 20, the ECB is highly likely to announce a major inflation of its money supply (masked by calling it quantitative easing). With the euro being a major world currency and the ECB also trying to settle whether to expel Greece from this currency union, the value of currencies in general are suffering from investor perception of increased risk. As a result, there has been some move out of currencies into gold and silver.
In another development on Jan. 15, of far more long range importance than the action by the Swiss National Bank, the Shanghai Gold Exchange (SGE) and World Gold Council (WGC) announced a joint project to establish a Free Trade Zone associated with the SGE. The SGE is already the world’s largest exchange for trading physical gold. The new move is meant to expand trading on the SGE from both domestic and international investors.
In the fine print of this announcement, it was reported that all transactions on the Shanghai Gold Exchange are settled with payment of Chinese renminbi yuan, not U.S. dollars. This is perhaps the most important part of this announcement. For some time, I have anticipated that China would attempt to make the Chinese market the largest world gold market for setting prices – making the yuan and not the dollar the currency in which gold is quoted around the world, with the corollary benefit of expanding the international use of the yuan. In the process of expanding the SGE internationally, the Chinese government is accelerating the day when the U.S. dollar is supplanted by the yuan as the world’s reserve currency. Make no mistake, this is a definite part of the plan in making this announcement. But, apparently, it was too important for the U.S. media to give this development much coverage.
Of even more immediate importance, late last week the Russian government ordered Gazprom to shut down natural gas exports through the pipeline that goes through the Ukraine. This action reduced total Russian gas exports from 221 million cubic meters per day to only 92 million cubic meters. By doing this, Russia cut off 100 percent of its gas exports to Bulgaria, Croatia, Greece, Macedonia, Romania and Turkey. Each of these nations is experiencing extreme supply shortages. Even other European nations such as France, Germany, and the United Kingdom derive at least 15 percent of their natural gas supply from Russia.
In making the announcement, Russian leader Vladimir Putin claimed that too much gas was being stolen out of the pipeline as it traveled through the Ukraine. Even if this is true, that isn’t the real reason for the shutdown of exports through this pipeline. In my judgment, this is an entirely political move that runs a high risk of increasing international tensions enough to perhaps deteriorate into military conflict.
These are not the only factors affecting gold and silver prices last week. However, you have to look at what these three developments tell investors:
First, central banks lie – so don’t believe whatever they tell the public.
Second, the U.S. dollar will be on the way down sharply in value when it no longer serves as the world’s international currency, which is coming sooner than expected and is coming despite the current temporary strength of the dollar.
Third, the risk of international financial or military conflict is much higher than most people realize, which makes the value of all fiat (paper) currencies shakier.
Investors probably wish they could find a way right now to sell short central banks. As my friend Marc Faber reminded me last week, they can do that by purchasing physical gold and silver. People outside the United States are starting to figure that out. Just because you live in the United States doesn’t mean you have to wait.
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 and http://www.coininfo.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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