The Mike Fuljenz Metals Market Report
August 2011, Week 3 Edition
Gold soared to a record $1,817.60 per ounce in intra-day trading on the Comex last week (i.e., the December futures contract on the New York Commodity Exchange), but then the Commodity Exchange's parent company (the CME Group) devised a way to "pop" the gold bubble by instituting 22% higher margin requirements, effective at the close of Thursday's market. The basic rule is that speculators in the benchmark gold contract must now put up $7,425 to open a position, and then maintain $5,500 of that deposit overnight, in order to hold on to that position the next day. This increased margin requirement caused a quick $88 downdraft to $1,730 early Friday, but then gold has steadily recovered through today.
It's important to realize that gold first crossed $1,700 last Monday, August 8, so any price above $1750 represents a huge two-week increase over the closing price of $1,613 two weeks ago. This was a case of five steps up, two steps down. The gold bull market is still strongly intact, despite the recent assault by the CME Group. This same kind of tactic - raising the margin requirements on silver - pushed the white metal down from nearly $50 to under $35 last May, but silver has recovered nicely, to near $40 today.
- Gold 52 weeks ago (August 9, 2010): $1223.50
- Gold's average price during 2011: $1478.55
- Gold's London Low for 2011: $1316 on January 28
- Gold's London High for 2011: $1786 on August 11
Last Week In Metals: Stocks had their most volatile week on record, while gold rose a net $50 after setting a record high $1818.
The Wild West Stock Shoot-Out on Wall Street Helped Gold
Last week, the Dow Jones Industrial Average gained or lost at least 420 points four days in a row. This spooked investors, causing massive sell-offs on Monday and Wednesday. The market seems calmer today, but the net result was a 17% drop in the major averages in just two weeks, July 25 to August 8. This shook the confidence of many stock investors, driving them into the arms of gold. When the stock market reached its bottom Wednesday, gold reached its peak, $1818 per ounce, but then the regulators stepped in to "pop" the gold bubble and bring traders back into the stock market on Thursday and Friday.
Adding to the stock market rescue team, Ben Bernanke sounded like a market savior last Tuesday when his Federal Open Market Committee (FOMC) said that the Fed would hold key interest rates near zero for another two years, at least, through mid-2013. This was a way to get investors out of the zero-yield gold and low-yield bonds, back into stocks, but it also fueled a gold rally, since the old argument against gold ("you can't earn interest on gold") backfired, since you can't earn much interest on U.S. dollars, either!
Bernanke also indicated that the Fed is examining all of its policy options to "promote a strong economic recovery." By that, he means he can print more money or buy more Treasury bonds, thereby debasing our dollar further. The Fed now controls nearly $4 trillion of cash and bonds on its balance sheet (up from less than $1 trillion three years ago), so it could easily launch another round of quantitative easing (QE-3). For further clues, we'll have to watch Bernanke's speech during the Fed's annual retreat at Jackson Hole, Wyoming next week, on Friday, August 26.
In the meantime, the former Fed Chairman, Alan Greenspan, gave gold a boost when he said on NBC's "Meet the Press" that "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default." By stating the obvious, that the U.S. can just print more money, Greenspan hurt the stock market and helped gold by saying the Fed's "emperor" has no clothes.
The Fed's move also killed the long-term U.S. Treasury market. Who wants to make a bet that the Fed can contain inflation over the next 30 years? Last Thursday, there was a 30-year Treasury bond auction that was very poorly received, with few bidders at current rates. Therefore, the long-term bond rose 27 basis points (0.27%) to 3.75%. Furthermore, foreign central banks only accounted for 12.2% of the total bidders, down from the historical average of 40%. Foreigners aren't as keen to own dollars as before.
This is very reminiscent of the first "quantitative easing" program of 40 years ago: How has that worked?
Excerpts from President Richard Nixon's Speech on August 15, 1971
40 Years Ago (on a balmy Sunday night), Americans were subjected to a nationally televised speech by a war-ravaged President who wanted to turn our attention to three new threats on the home front: (1) fears about "runaway inflation" (at 3%!), (2) a fear of lost jobs when the Vietnam War ended, and (3) the gradual erosion of the U.S. dollar. Here is a summary of what Richard Nixon said that long-ago night:
"Prosperity without war requires action on three fronts: We must create more and better jobs; we must stop the rise in the cost of living; and we must protect the dollar from the attacks of speculators.
(1) I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. In addition, I call upon corporations to extend the wage-price freeze to all dividends.
(2) We must protect the position of the American dollar as a pillar of monetary stability around the world. In recent weeks, speculators have been waging an all-out war on the dollar. I have directed [Treasury Secretary John] Connally to suspend temporarily the convertibility of the American dollar [to gold] to stabilize the dollar.
(3) I am taking one further step to protect the dollar...an additional tax of 10 percent on goods imported." -- Richard Nixon, August 15, 1971
How did these three measures "protect the dollar"? In the 40 years since then, the Swiss franc has gained over five-fold (+454%) to the dollar, rising from $0.23 in 1971 to $1.274 now. The German mark (which effectively became the euro) rose 478%, from $0.25 to $1.45. Most importantly, gold has risen in terms of every paper currency, including a 50-fold rise in U.S. dollars, from $35 to $1,750. That means the dollar has lost 98% of its value since President Nixon 'temporarily' closed the gold window 40 years ago.
Did inflation stop? No. The 1970s became the decade of the highest peace-time inflation in U.S. history. General prices are up 516% since August 15, 1971, according to the government's own Consumer Price Index (CPI). A basket of goods costing $100 in mid-1971 costs $615.76 today. However, the President's actions were wildly popular, gaining 75% approval ratings and pushing the stock market higher the next day. The Dow gained 4% the morning after the talk, on Monday, August 16, and +8% within three weeks.
However, not everyone was fooled. The "hard money" community was launched by Nixon's speech. For instance, the publisher of a political newspaper "Human Events," Robert D. Kephart, launched one of the first and most successful hard-money newsletters, "The Inflation Survival Letter" (now called "Personal Finance"). Also, a Colorado businessman, David Nolan, launched the Libertarian Party that fall, and a Texas medical doctor who doubled as a gold advocate, Ron Paul, decided to run for U.S. Congress. So, Mr. Nixon's actions created what turned out to be the solution to Nixon's folly: A gradual return to gold.
Prices for Many Gold Coins Outpaced Gold Bullion in July and Early August
Many choice and gem uncirculated $20 Liberty, $10 Indian and $5 Indian gold coins rose in price in July and early August, even outpacing gold bullion gains. Contributing to the rise were increased demand and diminished supply in the U.S. and Europe. Dealers reported that their inventories of many of these gold coins are much lower at the end of July than at the beginning of last month. With the highly active fall months approaching, look for prices for many gold coins to continue to rise. $2.50 Indians are now beginning to stir and rise as many dealers' inventories have diminished over the last month. Since the larger gold coin denominations dominate the trade from Europe, relatively few $2.50 Indians are imported from abroad to replenish depleted dealer inventories. So far in early August daily price increases for many of these gold coins has been the norm. Buying at current levels may save you money in the future.
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