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Big moves up in gold
are always exciting, and seldom signify anything good.
Before the March 18th Gift from Geithner, gold had virtually
gone into sleep mode since this time last month, drifting
downward some 10% following its near-achievement of the $1,000
mark (for only the second time ever) on February 20th.
On Wednesday morning (3/18/09), it looked like the latest
correction was working its way into a selling climax, with
business being done as far south as the low $880s. Then came the
explosion. In the space of about five minutes, gold sailed from
the $892 mark to the $920s, continuing its climb in the next few
hours of trading to hit the $961 mark.
Those of us staring at a gold or dollar screen, without a clue
what was going on, could only imagine that either the Fed had
made a momentous announcement, or a major American city had been
invaded by hostile aliens, or at least pummeled by a large
meteor.
In fact, the dollar’s swoon and gold’s turn-on-a-dime surge
coincided with Secretary Geithner’s announced commitment of some
$1.2 Trillion in further liquifications and bailouts, of exactly
whom, as has been the pattern since last September, we are not
to know.
Think about that number of March 18th: 1.2 trillion dollars
($1,200,000,000,000.00). For those of you keeping score at home,
that number is a dozen hundred thousand million dollars.
Assuming that there are one hundred million US taxpayers, that
amounts to $12,000.00 per taxpayer, that day. And don’t ask
where it’s going, because not only will they not tell you, but
also you probably don’t want to know.
As Secretary Geithner spoke, the dollar fell off a cliff while
gold rose some 8% in about an hour’s time. It turns out that
neither aliens nor meteors were involved, but Peter Schiff, in
his 3/20/09 article “The Mother of All Bells," contends that
Wednesday’s earthshaking event was even more significant:
"While nearly every facet of America's economy has been
devastated over the past six months, our national currency has
thus far skipped through the carnage with nary a scratch.
Ironically, the U.S. dollar has been the beneficiary of the
global economic crises which the United States set in motion. As
a result, our economy has thus far been spared the full force of
the storm."
Schiff continues, "This week the Federal Reserve finally made
clear what should have been obvious for some time - the only
weapon that the Fed is willing to use to fight the economic
downturn is a continuing torrent of pure, undiluted, inflation.
The announcement should be seen as a game changer that redirects
the fury of the financial storm directly onto our shores."
Jonathan Laing also saw this announcement as a ‘game-changing’
event, as outlined in his article "Wednesday Changed Everything"
in the March 23rd edition of Barron’s. However, his outlook on
inflation/deflation is the direct opposite of Mr. Schiff’s:
"This is the beginning of a financial surge by the Fed that will
not only bolster the economy by bringing long-term interest
rates down, but also augurs well for stock prices in the months
ahead."
One might quibble that long-term rates are pretty low already,
and point out that stocks lost ground in the two days following
this week’s ‘game-changing’ announcement, but instead we’ll let
Mr. Laing finish:
"…Concern seems miscast over the Fed’s printing new money and
thereby creating inflation and weakening the dollar. Looming
deflation is now the enemy. Fed buying is the only game in town
in the wake of the seize–up in private credit markets and the
huge wealth destruction that has taken place in both the
corporate and consumer sectors. Now, at least, there’s some hope
for both the economy and the stock market. And it’s about time."
To sum up, the financial "surge" by the Fed brings "hope." And,
Mr. Laing might add, if wishes were horses, we’d all be cowboys.
The U.S. Mint, in the meantime, continues to fail utterly at its
congressionally mandated task to produce bullion Eagle coins in
gold, silver, and platinum to meet public demand. Once again, we
have had to suspend sales of gold Eagles due to scarcity. During
the week of March 16th, the Mint released fewer than 10,000
1-ounce gold Eagles against a weekly demand of probably five
times that many coins.
The scandalous state of the Silver Eagles program is even worse,
and has been for over a year. Silver Eagles are being produced
at a rate that is so far short of actual demand that authorized
distributors who pay the Mint’s charge of $1.40 over spot for
the coins have, since this time last year, been able to command
a wholesale average of $3.50 over spot. Although this allows the
Mint's designated distributors to enjoy lush profit margins, the
net effect is to push retail prices for silver Eagles into the
$20 neighborhood for most US end buyers. It’s a simple
supply-and-demand equation. The Mint is not turning out enough
supply, and demand has soared.
Silver Eagles, which as recently as 2007 were readily available
in quantity through retail channels for less than $2.00 over
spot, now cost the US public more than double that premium.
That’s not right, and for over a year now the Mint has failed to
effectively deal with the problem.
The rest of the US Mint’s bullion programs have been ignored
completely. Gold Buffalo .9999 gold bullion coins haven’t been
produced this year, nor have fractional-sized gold Eagles. And
as for platinum Eagles, which would sell like hotcakes were they
available – well, the US Mint hasn’t emitted the first whisper
about them this year.
Basically, we are in the middle of a worldwide frenzy of retail
demand for precious metals bullion products. So where is the US
Mint while all this is going on?
Paul Gilkes, in his article in the 3/16/09 edition of Coin World
entitled, "Blank Shortages Continue for Bullion Coins," reports
that:
"The ongoing difficulty in the U.S. Mint’s ability to obtain
sufficient blanks to meet demand for its American Eagle gold and
silver bullion coins is continuing to delay the start of
production of other versions of the coins. Delays are also being
encountered for the production of all versions of American Eagle
platinum bullion coins and American Buffalo gold bullion coins."
Unfortunately for US buyers, our once-mighty Mint has outsourced
all refining and coin blank-preparation work to outside
contractors such as the Royal Canadian Mint and the Perth Mint,
both of which are swamped with demand for their own in-house
produced bullion products.
As a result, the US Mint, although capable of striking many more
coins than it currently produces, has to patiently wait for
outside sources to find time to do the marginally-profitable
work of turning out regulation precious metals planchets for the
US Mint’s use.
Is it any wonder that the flow of blanks from foreign mints is
so sporadic? After all, why should they even bother – in this
booming market, the major bullion-producing government mints are
able to sell, at a higher markup, every precious metal coin of
their own design that they can produce. The US Mint, a very
exacting customer that depends utterly on outside vendors to
produce coin blanks from their excess capacity when business is
slow, finds that lately there is no excess capacity.
We are now experiencing the inevitable downside of our Mint's
outsourcing its refining and planchet production: In an era of
unprecedented demand, the US Mint is standing last in line for
world precious metals supplies.
Of course, those other Mints distribute their wares in the US,
and over the past few months we have sold far more Maple Leafs
from Canada and Pamp Suisse .9999 gold bars from Switzerland
than gold Eagles, as supply comes into the US to meet demand.
But the fact that Eagles have not been consistently available at
reasonable markup is more than just a loss of market share by
our Mint, and an inconvenience to American bullion purchasers.
Arguably, the psychological effect of the Mint’s failure to
produce bullion to meet demand is contributing to dollar
instability.
It would be helpful if the Treasury Department, of which the
Mint is part, started to recognize the importance of the Eagles
bullion program. As we wrote to Secretary Geithner in January,
and repeat here:
"The issue goes deeper than simple inconvenience for bullion
buyers, and, yes, bullion dealers. The persistent shortages of
silver Eagles for most of 2008, and gold Eagles for the final
four months of 2008, (now continued in March of 2009-ed.)
engendered a mind-set among the precious metals crowd that
supply was simply not available while precious metals prices
were tumbling. In short, they saw conspiracy, manipulation, and
reasons to question even the legitimacy of the US Comex market
itself."
The public perception of a dichotomy in the gold/dollar markets
is anathema to the Treasury’s role in defending the dollar
against all enemies. People simply have less faith in dollars if
they cannot be spent on Congressionally-authorized US
Treasury-produced gold and silver coins at reasonable premiums
over spot market prices.
But enough of all this serious talk. Say, how about that Dirty
Gold campaign, anyway?
Christine Lennon, wrote in an April supplement to Time Magazine,
an article entitled "The New Gold Standard" with the subtitle,
"Concerned about dwindling resources, fine- jewelry designers
are taking a shine to reclaimed gold."
In this article we are exposed to the contradictions of those
who claim that the refining of scrap gold is a new, green,
environmentally correct miracle – endorsed by celebrities! -
that will save the earth from the ravages of gold mining.
Just from a public relations standpoint, it’s an astounding act
of sheer chutzpah to call freshly mined gold ‘dirty gold,’ and
at the same time label the gold recovered from pawn shop debris
and dental waste as "eco-gold."
"Few people want to think of the ring on their finger, which
leaves an average of 20 tons of mine waste, having such an
enormous environmental and human impact," Lennon quotes Payal
Sampat, the director of the No Dirty Gold campaign.
Of course, what starry-eyed couple doesn’t think that their love
is at least worth the crushing of twenty tons of rock in order
to extract the pure gold that gives the token of their esteem
its sparkle? Besides, a lot more people earn a living at mining
than working in gold refineries. Let the engaged couple think
kindly of the jobs in mining that their purchase will provide.
The essence of the Dirty Gold campaign is that mining gold for
mere jewelry is not worth the costs to the environment. Instead,
the morally ‘better’ gold is from the past, where the strife,
struggle, slavery, crime, and destruction of wilderness
committed in its obtaining is now, as the kids say, history.
So, is it really morally superior to buy gold that you don't
know where it has been?
And how romantic is it to buy jewelry made from gold which has
been recently recycled from other couple’s wedding bands,
surrendered ghetto bling, Grampa’s old dental work, or gold
recovered with toxic chemicals from computer scrap, rather than
newly-mined gold?
To put it plainly, the mining of gold for eons has meant new
scars in the earth, more pollution of waterways, and jobs for
those who could use the money to feed their families. As with
many human endeavors that don’t always seem fair or pretty, gold
mining simply is what it is.
And since gold is completely fungible once refined,
eco-conscious Americans choosing "reclaimed" gold can feel all
warm and fuzzy wearing their righteous bling, while the mining
and selling of gold worldwide goes on unabated.
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