January 2012, Week 5 Edition (Published by Texas Coin Company Universal Coin, an Award-Winning Gold and Rare Coins Dealer)
Gold is up nearly 10% year-to-date, while silver and platinum have risen almost twice as fast. Gold was the biggest winner on Wednesday, January 25, when it rose $77 within 24 hours. The biggest engine for gold's sudden increase came after the Federal Reserve's first-ever interest rate projection and inflation target rate, issued around noon on Wednesday. Gold is also rising because of the prospect that Iran and India may begin to exchange gold-for-oil, as a way around the global embargo against buying Iranian oil.
- Gold 52 weeks ago (January 31, 2011): $1327
- Gold's average price during 2012: $1643.31
- Gold's London Low for 2012: $1590 on January 3
- Gold's London High for 2012: $1727 on January 26
Last Week In Metals: Gold rose $74 (+4.5%), Silver rose $3 (+9.8%), Platinum rose $98 (+6.5%), while stocks rose just 0.2%.
The Fed's Latest Interest Rate & Inflation Targets Raised Gold $77 in One Day
In his State of the Union address, President Obama proclaimed that the American economy is healthy again, but the next day Fed Chairman Ben Bernanke issued a number of "soft money" directives which proclaimed that the U.S. economy was still so weak that it will need a constant transfusion of easy money until at least the end of 2014. This is an election year, of course, and the Fed Chairman is helping to re-elect the President by printing money, but his actions fly in the face of President Obama's cheery words.
First Time in History
Last Wednesday, for the first time in its 98-year history, the Federal Reserve issued interest rate forecasts and inflation "target" rates. The Fed now says that the acceptable level of currency depreciation is 2% per year. The gold market reacted immediately, with a $77 increase from noon Wednesday to noon Thursday.
In the same press conference, Fed Chairman Ben Bernanke said that the current "zero interest-rate policy" (ZIRP) will continue well into 2014, if not beyond, and that he plans to impose another round of "QE" (quantitative easing), or QE-3. This is "helicopter" Ben in action - printing money to solve all our ills.
Years ago, Mr. Bernanke got his nickname "helicopter Ben" by proposing a plan for the debasement of the dollar through over-printing money and dropping it from a helicopter. As he explained at the time:
"The U.S. government has a technology called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation." - Ben Bernanke, academic economist.
The huge surge in the price of gold and the drop in the dollar this week show that markets can respond quickly to the threat of renewed inflation, despite the new official inflation target rate of just 2%.
Will Iran Start Trading OIL for GOLD?
The second engine behind gold's recent rise is the prospect of trading gold-for-oil in the Persian Gulf.
The Western World has been trying to punish Iran for developing nuclear technology. The latest plan is a global trade embargo against Iranian oil, enforced by the presence of the U.S. Navy in the strategic Straits of Hormuz and nearby waterways. U.S. sanctions currently block the transfer of dollars and major foreign currencies into Iran, in exchange for oil. These sanctions ban any bank transferring oil payments to Iran.
However, Iran will not sit by and meekly accept the loss of their major source of revenue. Israeli sources reported that India has agreed to pay for its imported Iranian oil with Gold. Gold is not a bank currency transfer but a commodity, a barter exchange. U.S. sanctions against Iran block the transfer of dollars to Iran, but not gold. The U.S. sanctions ban any bank transferring funds to Iran. But the gold "loophole" protects India from U.S. sanctions against the countries which trade dollars or other paper money for oil.
India's current plan is to transfer its gold through the state-owned UCO Bank via Turkey's Halk Bankasi bank, since Turkey is another country that refuses to join in on the sanctions against buying Iranian oil.
Iran has also threatened to block the straits of Hormuz, thereby interrupting oil trade by the competing oil producers in the Gulf region, Kuwait and Iraq. Their only sea outlet is via the Persian Gulf. In addition, Saudi Arabia's Gulf ports would also become blocked by such a move. Saudi oil would then need to traverse the sands of the Saudi empire to ports on the kingdom's western (Red Sea) ports for shipment.
If this plan works, China may be next in line to buy oil with gold instead of dollars. Oil is much in demand and it doesn't carry a "Made in Iran" label. Once oil reaches a neutral port, it would be hard to determine its nation of origin. Oil is oil and gold is gold, but paper money is always traceable to a nation.
For years, we've heard the rumor that Iran will demand gold instead of U.S. dollars for oil payment. That warning never materialized into fact until the U.S. and Europe pushed Iran's back to the wall and blocked all paper money payments for Iranian oil. Now that India and Iran have begun the gold-for-oil exchange, what if this plan works well for them? What if more countries demanded payment in gold in future years?
The global market for oil is huge - dwarfing the value of all above-ground gold. Any huge volume of added demand for a finite amount of gold could push the gold price well above the $2,000 "barrier."
January Gold Rise Energizes Rare Coin Market
With gold prices up almost 10% in January, interest in rare gold coins is rising too. From small "mom and pop" coin shops to national dealers, I hear dealer commenting that "the wind" is now at their backs and not in their faces.
One major dealer was lamenting to me that he was having to pay considerably more for many gold coins than what he was selling them for just last month.
Open the windows and look outside, flags are flapping and it's getting windy!
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