Bullion moves up on fears

Questions over the ability and willingness of the Greek government to repay its debts, when the Federal Open Market Committee might raise some benchmark interest rates, the expansion of military conflict in the Middle East and the change in determining London gold prices have all helped gold and silver prices to rise over the past 10 days.

Gold had increased from the $1,140s to surpass $1,200 last week. At the same time, silver rose from around $15.50 to more than $17. As typical after such significant short-term moves, prices at the beginning of this week retreated somewhat from last week’s peak.

The Greek government debt problem has no solution that will avoid wreaking major damage in global financial circles. Too many central banks and large private banks are carrying Greek government debts on their books at full face value. If there is any outright admission that less than 100 percent of Greek government debt will be repaid, these banks would be forced to book tens of billions of dollars of losses. Therefore, the Greek politicians and officials at the European Central Bank (really meaning Germany’s government officials) are playing chicken with each other about whether to pretend there are solutions if only given more time, or just let the financial markets take the hit sooner rather than later. Ultimately, the politicians will not be able to push the resolution down the road and an economic conflagration will result.

The FOMC needs to keep interest rates low because the U.S. Treasury is the world’s largest beneficiary of low interest rates. However, the FOMC is caught in a dilemma where low interest rates signify a weak U.S. economy. Politicians in Washington want to at least pretend, even though the underlying data do not confirm it, that the U.S. economy is recovering. An economic recovery would make the politicians look competent. However, an economic recovery would also create pressure for higher interest rates as demand for loans to expand business operations increases.

As a result, the FOMC is forced to repeat self-contradictory messages. First, it announces that the economy is improving. Then it says that the recovery is shaky enough that raising interest rates immediately is too risky. At the conclusion of the FOMC meeting this month, the committee changed the verbiage in its announcement to make even more vague the issue of whether and when interest rates might rise.

This problem is even more complex. It was revealed in 2014 that governments and their sovereign investment funds now own more than 50 percent of all publicly traded stocks. Any rise in U.S. interest rates would eventually harm the profits, and therefore stock values, of many of these companies. Therefore, there is significant pressure from this direction for the FOMC to avoid raising interest rates. Over the past year, any hints that the FOMC might eventually increase their benchmark interest rates have been followed by plummeting U.S. stock prices.

Overall, the announcement at the end of this month’s FOMC meeting gave the impression that interest rate hikes are not as imminent as implied in the statement at the end of the previous meeting. This impression was reinforced by subsequent remarks made by a regional Federal Reserve Bank president who indicated that an interest rate increase would be coming before the end of this year, meaning that a rate hike is not going to happen as early as June (although you should not be surprised to hear comments continuing the pretense that higher interest rates could occur at any time).

This posture of pretending to go one way in raising interest rates while constantly postponing doing so has at least one precedent in world finance. For years, the International Monetary Fund announced that it was preparing to sell some of its gold reserves. Several times, the price of gold swooned after such announcements and took months to recover. The IMF never sold any gold after such promises. Eventually, when the price of gold was little affected by one such statement, the IMF finally did conduct a sale.

However, this sale, which the IMF pretended might make large quantities of physical gold available to private buyers, was entirely sold to central banks and governments. The Chinese government even offered to purchase the entire amount in a single transaction. Since this debacle proved that demand for physical gold was stronger than the IMF anticipated, it has never proposed another gold sale.

Like the IMF, I could see the FOMC eventually imposing one minor raise in interest rates simply to prove that all of their jawboning was not just all talk. But, I am confident that the FOMC could not afford to implement a second rate hike.

Military action increased in the Middle East when the Islamic Sunni government in Saudi Arabia attacked Islamic Shiite rebels in neighboring Yemen. The U.S. government provides armaments to the Saudis. At the same time, U.S. troops are working with mostly Islamic Shiites in Iraq and Syria opposing the Islamic Sunni ISIL rebels. As part of this latter effort, the U.S. government is working with the government of Iran at the same time that it is opposing Iran over nuclear energy and possibly weapons. These conflicts could easily get much worse before they get better. Part of the rise in gold and silver prices is almost certainly in response to heightened tensions in this corner of the world.

While the Chinese banks did not join to become direct participants in the new auction used to settle the London gold price, there are multiple Chinese efforts elsewhere to increase China’s international economic influence. The Chinese have formally asked for the yuan to be included among the currencies used to calculate Special Drawing Rights (SDRs), which currently heavily supports the value of the U.S. dollar. Instead of becoming direct participants in setting London gold prices, the Chinese are taking steps to make the Shanghai Gold Exchange much more influential in world gold markets. While it is possible than one or more of the three private Chinese banks that are full members of the London Bullion Market Association could become direct participants in setting London gold prices, I think the Chinese emphasis is to make the London gold market less important in the future.

In the meantime, recent rising gold and silver prices have led to a mini-surge in Americans buying physical gold and silver. Gold demand in India and China has been strong for several months now, as buyers jump at the opportunity to purchase at what are perceived to be bargain prices. By contrast, Americans as a whole tend not to jump in to acquire precious metals until the bargain buying is past and prices are rising. While demand over the past 10 days is up, it is not as extreme as we saw in April and June 2013 after significant drops in gold and silver prices.

As a consequence of demand only rising by a modest amount, you can still obtain virtually all bullion-priced gold and silver coins and bars for immediate or short-delay delivery. The Royal Canadian Mint is allocating supplies of the silver Maple Leaf, but the occasional delivery delays are minor. The U.S. Mint is about one million coins behind last year’s record setting pace of sales of silver Eagles and has largely been able to keep up with continuing solid demand.

As a result of product being relatively available, premiums for bullion-priced gold and silver coins and bars are almost all at normal levels. Since private fabricators ramped up capacity to respond to significant shortages in the spring of 2013, I don’t expect any difficulty obtaining product in the near future.

Though physical products are readily available at today’s gold and silver prices that may appear to be bargains, this can change quickly. Issues not in current production, with the U.S. 90 percent silver coins made up to 1964 being the most common example, are more susceptible to premium hikes during times of strong demand. With the recent jump in silver prices, the premiums for 90 percent coin over the past three weeks have come down 10-20 cents relative to silver value. That confirms that there is no shortage of physical gold or silver, despite the recent uptick in demand.

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).