Gold and Silver Demand Expands

By Patrick A. Heller April 12, 2011

Thus far in 2011, I am seeing an expansion in demand for purchasing physical gold and silver. I expect this will have a significant impact on prices in the coming months.

The Michigan State Numismatic Society Spring Convention was held in Dearborn this past weekend. With gold settling last Friday at an all-time high price (ignoring inflation) and silver closing at its highest price since early 1980, there was still not an onslaught of sellers liquidating their holdings. Yes, the amount of gold and silver my company purchased at its booth was significantly higher than we experienced in the past few years. Still, that jump in liquidation was completely offset by equally strong buying demand from customers, especially for silver.

The last time there was a general public clamor to purchase precious metals was in the 30 months leading up to Jan. 1, 2000, (Y2K). That surge in demand was for protection against possible calamities if there were widespread computer crashes after Dec. 31, 1999. Once that day passed with comparatively few problems, there was extensive liquidation of gold and silver by “weak hands” buyers that continued until about the first week of May 2000.

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My companies are not yet experiencing the surge in demand that we handled in late 2009. However, we are definitely becoming busier as the year progresses.

Last week, our staff probably served about 10 times the number of first-time customers as we have in a typical week during 2010. The behavior of these first- time customers is also changing. In the past, most typical potential customers would do a fair amount of due diligence. They would do research online and in newsletters and ask lots of questions of our staff. Frequently, they would make their first purchase on their second visit or call to our business.

Now, a noticeable number of visitors are stopping in our stores or calling on the phone to conduct a prompt transaction. Generally, such first-time customers have either been given strong specific instructions when referred by existing customers or they are literally led to our premises by a satisfied customer.

There is also another change I detect. We are enjoying what I would describe as “institutional” demand such as we have never seen before. The management of for-profit and even non-profit organizations that have excess cash flow are unhappy accepting almost 0 percent return on certificates of deposit, Treasury debt and savings accounts. At the same time, it seems as if one or more members of top management have done well in recent years through owning gold and silver. When this person brings up the idea of the organization owning precious metals, they are now finding their fellow decision-makers receptive to the idea. In the past few months, we have made several sizable sales to organizations that have never before considered ownership of physical gold or silver.

Let me give you some examples of news reaching the general public that I think is partly behind this growth of interest in owning precious metals. The number one reason is apparently greater awareness of rising consumer prices. Even though the U.S. Bureau of Labor Statistics in its latest report still claims that consumer prices have increased barely 2 percent from one year earlier levels, most people realize that statistic is far lower than what they are personally experiencing.

Last Saturday, the local Lansing, Mich., newspaper featured an article on the front page of one of its sections titled “Stock Up On It: A guide to stockpiling 9 pantry items.” The first sentence of the article states, “Grocery prices are on the rise again.” The essay then goes on to identify several products that are non-perishable or have long lives that can be acquired in quantity when stores periodically put them on sale.

On Monday morning, the most widely quoted stockbroker in the Lansing area was interviewed on a Lansing talk radio program. He covered several subjects including a statement that the federal government’s inflation of the money supply (quantitative easing) has had the effect of supporting stock market prices. He also specifically mentioned the “Plunge Protection Team” (formally known as the President’s Working Group on Financial Markets) as artificially supporting (i.e., manipulating) stock prices, a practice he did not endorse. While the stockbroker did present other reasons why he considered selected stocks as good values, the first things listeners heard was that stock market prices are being propped up by the U.S. government. The speaker also acknowledged that the U.S. government is now the largest buyer of U.S. Treasury debt. In effect, what the speaker said would shake the confidence of the general public in the strength of the stock market.

The March 19 issue of The Economist contains a Buttonwood column titled “Stopping quantitative easing may be harder than starting it.” The article starts off describing Bill Gross as the most famous and experienced bond fund manager in the world. Then the author asserts that when Gross’s PIMCO funds avoid owning Treasury debt, investors should take notice.

The second paragraph of this column is especially damning, “Mr. Gross is particularly worried about the effect of quantitative easing (QE) by the Federal Reserve, the second round of which is due to expire in June. He has described this process, whereby the Fed creates money to buy both mortgage-backed securities and Treasury bonds, as a form of pyramid or Ponzi scheme.”

Later on, the article quotes Gross as asking, “Who will buy Treasuries when the Fed doesn’t?” Gross is also concerned about the danger of a spike in bond yields as investors demand a higher return to compensate for the risks of inflation or dollar depreciation.

I have previously listed two indicators that would portend an above average likelihood of sharply higher gold and silver prices in the short term. The first of these is that the U.S. Dollar Index (a measurement of the value of the dollar against a market basket of other major currencies) would fall below 77. This index has been below 77 almost constantly for several weeks. Last Friday, the Index settled at 75.06, its lowest level since late 2009.

The second indicator is that the 10-year U.S. Treasury debt interest rate rises above 3.5 percent. The rate has mostly ranged from 3.2 percent to just under 3.5 percent over the past few weeks. However, the 10-year rate rose above 3.5 percent both last Thursday and Friday, ending the week at 3.58 percent. Should this interest rate remain above 3.5 percent for at least three or four consecutive days, there is a good possibility it may quickly jump significantly higher.

As the general public becomes exposed to more stories talking about rising consumer prices, or comparing the U.S. government’s program of quantitative easing to a “Ponzi scheme,” or revealing that the U.S. government is artificially propping up stock market prices, even more people will step forward to buy gold and silver as safe haven assets. Although we are noticing a definite increase in the number of bullion buyers, we are nowhere near to the widespread demand that would be a signal of a market top.

Patrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Mich., and writes “Liberty’s Outlook”, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at CoinUpdate (http://www.coinupdate.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns). 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 mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).