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Gold, Silver Past the Bottom?
By Patrick A. Heller
July 23, 2013

The resurgence of gold and silver prices, with gold roaring over $1,300 yesterday while silver blew above $20 might indicate that both metals have passed their bottoms of the cycle. The two metals were up over 3 percent and 5 percent, respectively, for the day.

There are significant developments from different directions that support the likelihood that the general decline of gold and silver since their 2011 highs is over and prices will now mostly rise. But, there are a lot of analysts who have been anticipating one more sharp drop before a major rebound in prices.

Let’s review some of the fresher news that has affected prices right now.

First, late last week, Federal Reserve Chairman Ben Bernanke testified before the House Committee on Financial Services. Observers reported that Bernanke seemed unusually tired, melancholy and subdued during this appearance.

On the more accurate accrual basis of accounting, Bernanke oversaw the U.S. government’s more than $20 trillion of budget deficits over the past four years, incurred to supposedly rescue the U.S. from financial problems caused by previous huge budget deficits. Instead, these expensive financial gimmicks have not returned the U.S. economy to sustainable prosperity. Both Bernanke and President Obama in recent weeks have made statements that Bernanke may be near the end of his tenure as Federal Reserve chairman. It is possible that Bernanke now realizes that implementing his “Bernanke Doctrine” has failed and that he has no other ideas on how to rescue the U.S. economy.

Bernanke made statements to Congress last week where he admitted that he does not understand the gold market and that, if the Fed even reduces its current pace of quantitative easing, the U.S. economy will tank. Such comments almost inevitably shake the confidence of Wall Street financial people.

Second, Bernanke’s state of mind might have been influenced by the remarks of Keith Hall last week. Hall stated, “Right now [it’s] misleadingly low.” His statement was in response to the question of what he thought about the July 5 report from the Bureau of Labor Statistics that the U.S. U-3 unemployment rate was only 7.6 percent. In Hall’s mind, the correct figure is probably in the 10-11 percent range. So, who is Keith Hall? He was the head of the Bureau of Labor Statistics from 2008 to 2012.

Third, the COMEX August gold and silver options contracts expire on July 25. Of course, the higher that gold and silver spot prices rise before Thursday, the greater will be the demand to exercise the call options and take delivery of the physical metals. Whatever is the demand for delivery of gold will only cause greater problems five days later.

July 30 is the First Notice Day for maturing COMEX August commodity contracts. COMEX registered gold inventories have fallen sharply thus far in 2013, by more than one-third with less than one million ounces now available to make physical delivery of maturing contracts.

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Late last week, there were still open COMEX August gold commodity contracts representing more than 19 million ounces. Theoretically, any parties who did not want to take delivery of the physical gold on such maturing contracts have until July 29 to liquidate their positions or roll them over into future month contracts. While almost all COMEX contracts will be closed out or replaced with contracts going further into the future, the recent trend has been for a higher percentage than in years past of COMEX gold commodity contracts to be settled by physical delivery. It is not out of the question that demand for delivery next week could literally exceed 100 percent of the COMEX registered gold inventories.

Fourth, the Shanghai Gold Exchange settles its gold contracts by delivery of physical metal. In the first six months of 2013, about 35 million ounces were delivered on this exchange. That makes it, by far, the world’s largest venue for trading physical gold. Not only is it the largest, the volume is roughly equal to all the gold mined worldwide except for China and Russia. In other words, the customers of this one exchange, all by itself, absorb almost 100 percent of gold mine output. If nothing else leads to sharply higher prices, this news will do it all alone.

Fifth, the gold commodity markets are in backwardation. In normal markets, future prices are normally higher than the current spot month. This condition is called contango. However, the current spot month prices are higher than nearby future month prices. The gold forward options (called GOFO) have now been in backwardation since July 8. The last time that the GOFO was negative occurred in 2008. Back then, the backwardation preceded a significant rise in the price of gold. When current spot prices are higher, that indicates a current physical supply squeeze is under way.

Sixth, the government of India is doing just about everything it can to curtail private gold demand in that country. The government is trying to stem the size of payments that need to be sent to other nations to pay for all the gold that is being imported. For instance, Indian importers are now required to export 20 percent of all gold that they import. The remaining gold must only be sold to jewelers. Thus far, this effort has been very successful at cutting gold demand. However, the unintended consequence of this action has been that physical silver demand in India has soared.

Seventh, the Federal Reserve announced last week that they are reconsidering a 2003 determination that certain commodity activities were complementary to financial activities and therefore permissible for bank holding companies. Today, the Senate Banking Committee is holding hearings on whether banks should be allowed to control power plants, warehouses and oil refineries.

Saule Omarova, an associate law professor at the University of North Carolina, is scheduled to testify today. She asked, “Are they using this opportunity to in fact review the entire position of banks in physical commodity markets?”

It is entirely possible that gold and silver prices could shoot up even further over the next two weeks. If gold can surpass $1,350 and hold it at least three days, that will be a strong sign that the bottom is in the past.

Silver has more ground to make up. There are several major buy orders in place to be executed should the price regain at least somewhere between $23 and $25.

If both of these metals don’t hit those targets, then the odds are higher that there could be one more major dip in prices before the 12-year long bull market resumes. Should they reach those goals by the end of August, that will almost certainly signify that the bottom has already passed.

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 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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