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Gold Drop: An Opportunity?
By Patrick A. Heller
June 25, 2013

“When are gold and silver prices going to go back up, if ever?”

This question, or variations of it, is the most common inquiry made of coin dealers today.

As of the COMEX closes Monday, the price of gold is down over 28 percent and silver almost 44 percent from October 4, 2012. Results like these have many “strong hands” owners of precious metals wondering where they went wrong in their thinking. More than a few have bailed out.

So, will gold and silver prices ever go back up and when will that happen? The obvious answer is that I don’t know. Actually, no one knows the answer. However, there are a number of things from financial markets that indicate that the prices of gold and silver are continuously suppressed for the benefit of the U.S. government rather than prices fell as the result of free market trading. Further, the tactics now used to manipulate prices indicate a greater degree of desperation than did the measures of years past.

For example, when prices fell in mid April and again since last Thursday, the declines were attributable to massive quantities of gold and silver being sold in a short key time, a pattern that does not normally occur in a free market. Parties seeking to liquidate a large gold or silver position at the highest possible price will try to do so while attracting the least attention. Almost always, such sales are allocated among multiple brokers, none who know that they are only handling a small part of the total quantity being sold. Such sales also tend to be sold over the course of multiple days and even weeks and months so as to avoid attracting attention to any broker’s activity.

The suspicious activity in April and this past week involved single massive sales that were executed precisely at critical times during the day. Among these key times are 1) the opening of the London Bullion Market Association, 2) at the London AM gold fix, 3) at the COMEX open, 4) at the London PM fix, 5) at the COMEX close, and 6) during the ACCESS market which opens 30 minutes after the COMEX closes. By large quantities, I mean that some of the individual sales were for paper contracts equal to multiple months of worldwide mining production. About the only entities that could even arrange for the size of some of these sales are a handful of central banks and international institutions such as the International Monetary Fund and the Bank for International Settlements. Effectively, these sales were structured to guarantee that the metals sold for the lowest possible price – not the goal of investors.

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I have written many times in other essays on other tactics. In years past, the tactics were much more subtle and hard to detect. The fact that recent price suppression tactics have been so blatant could be interpreted as a sign that the perpetrators are coming to the end of the line. So, the nature of the trading is a sign that gold and silver prices are more likely to rise than continue to decline in the near future.

For gold in particular, the price has fallen low enough that many existing mines can no longer operate at a profit. With the just announced $5.5 billion asset write-off by Newcrest Mining, mining companies have recently booked $17 billion of losses from write-downs of paper assets. Barrick Gold Corporation, the world’s largest gold mining company, and Newmont Mining Corporation, one of the other largest gold mining companies, have not yet booked paper losses. They are expected to do so in the coming weeks.

Last week, Barrick Gold Corporation announced layoffs of more than 10 percent of its Utah mine workers, other layoffs at its Nevada operations and as much as a 30 percent reduction of its corporate staff. This followed previous announcements that the company may not be able to continue development of some of its largest mining projects in South America (such as Pascua Lama). Barrick’s news followed a recent announcement by Newmont Mining Corporation that, because of falling commodity prices, it was laying off staff at its mines in Colorado.

While the supply for physical gold and silver may be at risk of falling, demand has been soaring. In the months of April and May, China and India together consumed more gold that was produced worldwide by mines or as salvage from recycled scrap during those two months. Beyond that, other central banks were buying gold reserves such as Russia and South Korea. Then you have demand from private investors. Some photos circulated around the Internet about a week ago of about 10,000 customers waiting in line to make purchases from a gold-selling store in China.

Some have argued that investor demand for physical gold and silver is falling, as evidenced by the drop in the number of outstanding shares of the largest gold and silver exchange-traded funds (GLD and SLV, respectively). Contrary to what these naysayers proclaim, I believe that the physical metals were withdrawn from these ETFs in order to meet demand for physical gold and silver from commodity contract owners who want to own physical metal rather than paper.

As for the timing of the price drops, on days when the stock or bond markets or maybe some currencies are weak, it wouldn’t look good for the U.S. government’s interests for the prices of gold and silver to be going up. Some investors, if they saw this happening, just might be tempted to bail out of their paper assets and switch into something safer such and gold and silver. To me it is no surprise that the drops in precious metals prices over the past two weeks occurred at the same time that both the stock and bond markets were tanking. With gold and silver prices falling at the same time as paper assets, it is much less likely that the average investor would get out of paper assets for tangible gold and silver.

In the immediate term, I think the U.S. government has a plan to hold down gold and silver prices through this weekend, which marks the end of a calendar quarter where technical chart traders derive some of their numbers. Next week, I suspect that prices will stay down as many people focus on the upcoming July 4 holiday weekend.

In fact, I have heard from multiple level-headed analysts and traders who remain bullish on the intermediate and long-term outlook for gold and silver. Yet, at the same time they fear that prices could stagnate as long as the next three months. Even though the fundamental supply/demand equation for physical metals is so favorable for much higher future prices, the current doldrums could last until September.

Last Friday, I was interviewed for an article where I stated that a lot of potential buyers of physical gold and silver are growing weary of the eight months-long decline in precious metals prices. Even though their rational mind might tell them that current prices are a bargain compared to what is likely to happen in the coming months and years, they are just as fearful that we haven’t yet touched the final bottom of this correction. To say it another way, I think a number of investors will sit on the sidelines until there is a definite sign that gold and silver prices are on their way back up.

Although we have seen demand for physical gold and silver pick up at my store in the past few days, it is nowhere close to the buying surge we experienced after the price drop in mid April. I am confident that prices will soar much higher mostly because I am confident that the U.S. government is running out of measures to prop up the value of the U.S. dollar. If, for instance, the price of gold reached $1,420 and silver topped $25 within the next few months, I would expect so much buying to be happening that it will make April’s surge look modest by comparison.

Today, it is still possible to acquire many forms of physical precious metals – and get them at almost normal premiums. By the time September rolls around, I cannot guarantee availability or premium levels. The time to acquire insurance against the risk of falling paper asset values, which I consider to be the most important reason to own physical gold and silver, is when you don’t need it. Don’t wait until paper asset values drop another 10 percent and it is difficult to acquire precious metals, no matter the price.

Yes, I am sticking out my neck in expecting much higher gold and silver prices, but figuring that there will be some time lag before prices go uphill. I am equally convinced that those who made purchases sometime between early October and now will be very happy they did and then held onto them, even though they might wistfully think about how much less these tangible assets might have cost if purchased today.

In the meantime, these lower prices are making coin dealers and hard asset market analysts and newsletter writers look like they don’t know what they are talking about. In the short term, anything is possible. In a couple of years, I expect the epithets that will be thrown at me are for being too cautious in my recommendations. You just cannot please everyone all of the time.


Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Other commentaries are available at Coin Week and CoinInfo.com. He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly.” His 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.




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Comments
On June 25, 2013 Tom said
I would like to know what the markup that dealers use has done over time.  When I saw prices falling, the prices being charged by dealers did not fall in similar fashion. Retail buyers may be holding back because they feel they are being overcharged.
On June 26, 2013 Dale Holmgren said
This week is clearly the bottom. In fact, Wednesday is the bottom.  Futures contracts for delivery last trading day is Wed, and first notice day is Friday.
On June 26, 2013 Thomas Vaultonburg said
Doesn't it become irrelevant at a certain point who is suppressing the price? It's apparently an 800 LBS gorilla and when do you just give up fighting a bully too big to defeat?
On June 26, 2013 Rugged said
Gibsons Paradox in practice.
Since most people nailed the last plunge by BUYING not selling physical, I would say the manipulation is not long for this world.
Central banks, the general public, and China are all buying on these take downs.
In reality, the government can take the price to zero if they want but there will be ZERO physical for sale at that price ;-) Hang in there!
I've been here since the early 2000's and I'm not going to quit and give up now.
I suspect they'll change the law when their hand is played out. Bankers never loose - they just change the rules. If I can't sell my physical, I'll dump it in the ocean before I let them have it!!!

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