Lower Prices Stimulate Physical Gold Sales
Broadcast 05/18/2011 on WILS-1320 AM
Click here to get to the broadcast in mp3 format.
Welcome to another edition of Things You “Know” That Just Aren’t So, And Important News You Need To Know presented by Patrick A. Heller, owner of Liberty Coin Service and Premier Coins & Collectibles in Lansing and Delta Township. Take it away Pat.
Good morning. The recent lower gold prices, dipping below $1,500 in the past week, have stimulated demand for the yellow metal.
In the first two weeks of May, the US Mint sold 85,000 ounces of gold American Eagles. If this pace continues, the Mint would sell more gold Eagles in May than in any month since July 2010. On May 13, Rand Refinery Ltd, the manufacturer of the Krugerrand, stated that their monthly sales were headed for their highest volume month since August 2010.
This rise in demand is being echoed by gold vendors worldwide. UBS, Switzerland’s largest bank, reported that on May 9 it had its second highest sales of physical gold for any day thus far in 2011.
On May 16, Bloomberg reported the results of a survey of 31 analysts, traders, and investors. Survey respondents predicted an average gold price at December 31, 2011 of $1,750, and even higher prices in 2012. One respondent, Martin Murenbeeld, the chief economist at DundeeWealth in Toronto stated, “There is no sign that gold has peaked. We’re going to find that the US economy is not very strong. The dollar will go down.”
The fall in gold prices over the past week can be partly attributed to the temporary strength of the US dollar, which benefited from the sudden decline in the Euro.
The dollar also rose in the past week because the US government is posturing that it will stop inflating the money supply when the Quantitative Easing 2 program concludes at the end of June. Were this to happen, that would indeed lead to a higher dollar value. However, this posturing is an empty promise. US government officials cannot afford to risk suddenly destroying US jobs and depriving companies of liquidity. I am confident that the feds will bow to political pressure and continue inflating the money supply, though I expect them to still pretend that it is only “temporary.”
I have another reason for the rise in gold demand. Because silver is a much smaller market, its price has been more volatile—in both directions. Silver increased so much that the gold/silver ratio had fallen all the way from 80 a few years ago to near 30 in late April. The lower gold/silver ratio led some investors to now consider gold as a better value than silver. Further, when prices began their recent decline, gold fell by a smaller percentage. I think the relative strength and stability of gold prices compared to silver over the past few weeks has also encouraged more interest in the yellow metal.
When gold and silver prices first dropped in April, I anticipated they might recover in as little as two weeks. It now seems obvious to me that the US government has instructed its trading partners to not allow the price of silver to approach anywhere near $50. Apparently the feds have also drawn a temporary battle line at $40.
Though demand for physical silver has tapered off in the US, it remains extraordinarily strong in India and China, two of the world’s largest silver-consuming nations. In India, demand soared for at least the last seven weeks, even before the price came down. These buyers considered silver to be a good value when the price was in the high $40s. For the more than two billion residents of this planet, silver looks like a screaming bargain at prices in the $30s.
When you add this surge in demand for physical gold and silver to the many reasons to be concerned about the US economy and the US dollar, I don’t expect their prices to stay this low indefinitely. From past experience, the continuing strong demand for physical precious metals should eventually overcome all the tricks and gimmicks used to suppress prices. We may have to wait until September to see the silver price break $50. It could happen much sooner.
That’s it for today. Tune in again next week for more “Things you ‘know’ that just aren’t so, and important news you need to know.” I’m Patrick A. Heller, owner of Liberty Coin Service in Lansing and Premier Coins & Collectibles in Delta Township. Thank you for listening.