High Gold Not at Peak Yet

By Patrick A. Heller August 23, 2011

As I write this Tuesday morning, the price of gold has topped $1,900 overnight for the first time ever. Thus far in the month, gold is up almost 16 percent and silver more than 7 percent. This is definitely not a normal August for precious metals.

The typical August is part of the summer doldrums, where gold and silver prices are relatively stable. Many people are on vacation. There are no special gift-giving times in Far Eastern nations. Jewelry manufacturers usually don’t place holiday season precious metals orders until September. There is a feeling that one can always wait until tomorrow or next week to trade gold and silver.

Since gold and silver have been so strong this month (and in absolute terms), it is fair to ask if prices are near a peak.

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In my judgment we are nowhere close.

In other articles and newsletters, I have detailed global financial crises that are now growing worse on almost a daily basis. These problems are not getting genuinely fixed. As a result, the financial uncertainty will continue to prompt more people to seek the safety of gold and silver. However, there are several fresh developments that indicate prices could continue to rise.

Even as the spot price rose in COMEX trading yesterday, the number of open silver contracts rose about 5,800. This is a sign that one or more major players are taking on JPMorgan Chase’s short positions by snapping up any new short contracts that are offered for sale. This implies that JPMorgan Chase’s previous tactic of shorting silver contracts without owning the physical metal is no longer successful at driving down the price. Instead, what will likely happen now is that more buyers will come into the market.

On Aug. 12, the latest Thomson Reuters/University of Michigan preliminary August indication of consumer confidence reported the lowest level since May 1980. The U.S. Dollar Index continues to trade within 1 percent of the 73.70 level which would give a technical signal for the U.S. dollar to quickly fall further in value.

There is widespread negative public reaction (and that is stating it mildly) to the revelation of how much the Federal Reserve secretly loaned to major U.S. and foreign banks in 2008 to avoid the collapse of the banking system. Altogether, the Fed advanced up to $1.2 trillion at the peak on Dec. 5, 2008. According to Bloomberg, this amount exceeded the combined profits of all federally insured U.S. banks for the entire decade through 2010. It also dwarfed the $46 billion of Federal Reserve crisis lending on Sept. 12, 2001, the day after the attacks on the World Trade Centers and the Pentagon.

The top beneficiaries were Morgan Stanley at $107 billion, Citigroup at $99.5 billion and Bank of America at $91.4 billion. Among the top 30 borrowers, the Royal Bank of Scotland received $84.5 billion and Swiss bank UBS borrowed $77.2 billion. Even Germany’s Hypo Real Estate Holdings collected $28.7 billion.

What the public may be sensing from this new disclosure is just how precarious the global banking system really is. People are literally alarmed at the size of the bailouts and also that the details were kept secret. It leaves them uneasy about just how much other bad news the U.S. government is hiding today.

The strongest indicator to me that we are not near peak prices is the behavior of our customers. At previous major market peaks, there was a frenzy of the general public rushing to buy gold and silver – with little attention to due diligence. Although there are more people buying precious metals every day, it is nowhere near a frenzy. Also, the buyers still tend to be those who have done their due diligence to understand why they are buying. They are not just buying because the news is reporting gold at new high prices on almost a daily basis.

In contrast, we are repeatedly setting records for the largest number of customers selling gold and silver to us in a single day. The sellers today, however, are often seeking cash flow to help pay the mortgage, utilities, or for food and are taking advantage of the higher metals prices. We had long lines of customers selling precious metals to my company at the peak in late 1979 and early 1980, but they were then mostly taking advantage of unexpectedly high prices rather than necessarily seeking to help put food on the table and a roof over their heads.

I don’t expect gold and silver prices to peak until we see the general public seeking to buy gold and silver simply because the prices have been rising. We are not close to that point yet.

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).