Calm worries with gold

Prudent people need to acquire a permanent wealth insurance position of bullion-priced physical gold and silver coins and ingots.

I’m getting nervous about the U.S. and the world economy. Despite a stream of positive economic reports from politicians, bureaucrats and the regular media, other bits of news that doesn’t get much coverage seem to portray a contradictory story.

This concerns me because what does or does not come to pass in the near future will directly impact the value of the U.S. dollar. Fluctuations in the value of the dollar impacts precious metals prices.

Let’s look at some of the factors where I think the general public is not really knowledgeable enough to give full weight to the potential consequences.

First, the Federal Open Market Committee has been slow at raising the federal funds interest rate. One pretext for this slower reaction has been that the impact of inflation of the money supply was supposedly below 2 percent annually. When the change in the Consumer Price Index rose above 2 percent, the Fed then stated they were looking at the growth in consumer expenditures rather than price changes. Well, here are the most recent figures on changes in the Consumer Price Index and Consumer Expenditures, as posted by the Bureau of Labor Statistics:

July 2018 All items Consumer Price Index up 2.9% since July 2017 (https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category.htm)

2017 Annual Consumer Expenditures up 4.8% over 2016 (https://www.bls.gov/news.release/cesan.nr0.htm)

When average Americans come to the realization that the value of their dollars are falling to that extent, this will encourage them to reduce their dollar holdings and also likely spur increased demand for physical gold and silver.

Second, I have discussed how the maturing COMEX gold and silver futures contracts have seen a huge increase in settlement by “Exchange Futures for Physical” (EFP) process. In this settlement method, which was originally considered to be only used for emergency situations, a party obligated to deliver the underlying metal of a maturing contract can instead pay some amount of cash plus deliver another futures contract (in practice almost always in the London market) for the equivalent amount of the metal. The reason this should rarely occur is that it is the most expensive way to settle a contract (the other options are delivering the physical metal, settling for cash, or delivery of shares of an exchange-traded fund for the same number of ounces). The use of EFP settlements started to rise noticeably late last year, and kept increasing early this year. Unfortunately, once a COMEX contract is settled by the EFP process, the trail of what eventually happens becomes opaque. As best researchers can tell, the London market inventories are not being drawn down by the size of the COMEX contracts being settled by EFP, but no further information is available on just how such contracts are being ultimately settled. So, I am concerned that there could be some funny business going on behind the scenes in an effort to mask or hide strong demand for physical precious metals.

Third, it is already well known that China and its central bank have been adding substantial gold reserves since 2003. I heard rumors that this was happening back in 2003, finally received enough corroboration to report on it in 2005, and the Chinese finally admitted it in April 2009. However, I am virtually certain that the Chinese government has acquired far more gold reserves than it is officially reporting. The Chinese have sovereign investment funds and other entities that could be, and I believe actually are, adding gold reserves that are not being disclosed. At the same time that China is adding gold reserves, it has also been reducing its reserve holdings of U.S. dollars and Treasury debt.

Also, several years ago, when the Russian Central Bank was reporting it held 500 tons (16.07 million ounces) of gold reserves, Russian leader Vladimir Putin was dismayed to learn that only about one quarter of the total was physically held in Russian government vaults. The rest was out on lease, where the ability of the lessees to repay their gold when due was uncertain. He quickly ordered that leases not be renewed when they matured and that all gold reserves be repatriated. With the recent threat of economic sanctions by the U.S. government against Russia, that government has accelerated its acquisition of gold reserves, reducing its holdings of U.S. dollars and Treasury debt in the process. Russian gold reserves are now close to 2,000 tons (about 64 million ounces).

Early this month, the Reserve Bank of India, that nation’s central bank, revealed that it had added 8.46 tons (272,000 ounces) of gold reserves during the 12 months ended June 30, 2018. While the quantity is modest compared to what the Chinese and Russian central banks have added, India has rarely purchased any gold reserves. Its last acquisition was 200 tons (6.43 million ounces) from the International Monetary Fund in November 2009. It is possible that this recent addition to reserves was funded through reductions in U.S. dollar and Treasury debt reserves.

Between the government and the public, China and India are the world’s two largest gold consuming nations. For the central banks and the governments to be adding gold reserves, especially by liquidating U.S. dollars and Treasury debt, portends bad news for the future of the U.S. dollar.

Fourth, several countries are dealing with highly unstable currencies today. Among them are Argentina, Iran, Nicaragua, Turkey, Venezuela and Zimbabwe. As more nations suffer depreciating currencies, the financial stress on other paper currencies will mount.

Fifth, in my mind the most important issue facing American governments from the federal down to local levels is the unsustainable level of debt and unfunded liabilities for government employee pensions and retiree health care benefits, Social Security, and Medicare. There is no accurate source of the net present value of the total of all these liabilities. However, my best calculation is that they now total at least $100 trillion, a total that is more than five times the U.S. Gross Domestic Product! It just will never be possible to pay off all of it in U.S. dollars at current purchasing power. Therefore, there will be a lot of financial pain to go around. Retired government employees will not receive all of their promised benefits. Large numbers of existing government jobs will be cut. Taxes will go up. The U.S. Treasury and Fed will ramp up their efforts at debasing the value of the U.S. dollar.

Despite the massive size of government debt and unfunded liabilities, candidates running for election are almost universally avoiding any discussion on this subject. The few who do are only proposing temporary patches that are not close to being comprehensive solutions.

When you review just these five financial trouble spots, ignoring everything else, it is just about guaranteed that the long-term value of the U.S. dollar is going to plummet. All the attention being devoted to other good news will not overcome the impact of these issues. It is for at least these reasons, and there are many more, that prudent people need to acquire a permanent wealth insurance position of bullion-priced physical gold and silver coins and ingots.

Patrick A. Heller is winner of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award, 2012 Harry Forman Dealer of the Year Award and 2008 Presidential Award. 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).