As I write this Monday morning, Aug. 24, the Shanghai Composite Index has fallen more than 35 percent since its June peak and the Dow Jones Industrial Average is down about 12 percent from its peak less than six weeks ago.
At the same time, the price of gold is up about 8 percent from its lows earlier this month and silver is up about 3 percent.
In normal markets (meaning those not being manipulated by the U.S. government and its primary trading partners and allies), the results would be much worse for paper assets and gold and silver prices would be much higher.
However, it was revealed last year that central banks and sovereign investment funds around the world now own more than 50 percent of the value of worldwide exchange-traded stocks. As a consequence, there is a huge temptation for governments to prop up stock values to minimize the financial damage to their holdings.
By Executive Order 12631 signed by President Reagan on March 18, 1988, the U.S. government established the Working Group on Financial Markets (popularly known as the “Plunge Protection Team”). This was done to avoid a repeat of the massive one-day drop in U.S. stock markets on Black Monday, Oct. 16, 1987. The four members of this group are the U.S. Treasury secretary, the Federal Reserve chair, the Securities and Exchange Commission chair, and the Commodity Futures Trading Commission chair.
On Oct. 6, 2008, for instance, the Plunge Protection Team issued a statement that it was taking multiple unspecified actions to stabilize US financial markets. There is no reason to believe that this team is now sitting on the sidelines in current scary financial markets.
Gold and silver are both precious metals whose prices tend to move in the same direction about 70 percent of the time. However, they operate in different markets. Approximately $100 billion of new gold supplies come onto the markets each year from mining and recycling operations. Combined, central banks currently hold more than $1 trillion of gold reserves. Gold is primarily a financial asset, where its use in fabricated products is a relatively minor percentage of demand.
In contrast, silver is a much smaller market. At current prices, only about $16 billion of the metal comes onto the market each year from mining and recycling operations. Industrial demand (excluding jewelry) makes up roughly 50 percent of total demand. Central banks have little to no silver held as part of reserves. Because it is a much smaller market than gold, the price of silver tends to rise by a greater percentage than gold in a bull market for precious metals. In weak markets, silver’s price tends to decline by a greater percentage than gold.
In precious metals trading early Aug. 24, silver is being pushed downward at a greater percentage than silver. In my mind, this is a clear sign of market manipulation. The gold market requires a greater financial commitment to suppress prices. Therefore, when global financial markets are extremely turbulent, it is much easier to knock down the price of silver. As the price of silver drops, that signals investors to also be leery of getting out of paper assets and into gold.
Yet, what is happening in global paper financial assets now perfectly demonstrates why just about everyone should own some physical gold (and silver) as protection against declines in paper asset values. Here is who should own holdings of precious metals:
- People who anticipate that gold and silver will outperform other asset categories. Obviously, if you think precious metals will outperform paper assets such as stocks, bonds, and currencies, you should own some as part of a diversified portfolio.
- People who don’t necessarily consider gold and silver to have better appreciation prospects than other asset categories. No one knows exactly what the future will hold. For this reason, prudent investment advisors recommend diversification among asset categories. Physical precious metals are an excellent diversification, which can be considered as a form of “insurance” against the risk of losses in paper assets.
- People who think that, for whatever reason, owning gold and silver is a bad idea. Even if some people are negative about owning gold and silver, its current price action as stock markets are now falling demonstrates that they also need to diversify their holdings by owning some “insurance” in the form of precious metals.
Just like people consider it prudent to own home, life, car, and health insurance, so too should everyone own some physical gold and silver as financial insurance.
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, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects.
More Collecting Resources
• Download The Metal Mania Seminar with David Harper to learn more about the metals market.
• Hunter? Naturalist? Purchase the 2014 World of Hunting – Red Deer silver coin to add a majestic coin to your collection.