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Hold Cheer Until Gold Hits $1,500
By Patrick A. Heller

Perhaps the most significant news involving gold in the past week was the pattern of gold trading after last Friday’s Bureau of Labor Statistics announcement of the U.S. unemployment rate.

According to the BLS, the U-3 definition of the unemployment rate had jumped 54.5 percent in the past 12 months to 10.2 percent. This is the most commonly reported unemployment rate.

The BLS also reported that the U-6 definition of unemployment had climbed 45.8 percent from a year ago to its current level of 17.5 percent.

As those who have read my past columns understand, both of these reported figures understate U.S. unemployment. According to John Williams’ Shadow Government Statistics (www.shadowstats.com), using the BLS methodology before it was changed under President Clinton, the current U.S. unemployment rate is about 22 percent.

A poor unemployment report reflects negatively on the U.S. economy with the result that the U.S. Treasury would have to pay a higher interest rate on its debt. One way to offset the poor unemployment news would be by having the U.S. dollar show strength against the price of gold (i.e., having the price of gold drop).

The U.S. unemployment report matters to the gold market because of the regular pattern of U.S. government gold price suppression coincident with the release of this data. Of the previous 50 monthly reports, almost all showing a rising unemployment rate, the gold’s price has been clobbered 48 times almost exactly as the reports were released. Gold often took a few weeks to return to the pre-suppression levels. In the past year, however, the price suppression has had a shorter term effect.

Last Friday, the price of gold was rising overseas before the release of the latest unemployment figures. With the release of the data, the price of gold actually kept increasing. As it neared $1,100, price suppression tactics kicked in. First, the price of gold was knocked down about $10 almost instantly, not long after the London p.m. fix was set. A price suppression effort right after announcement of the London p.m. fix is one of four standard times during the day that the manipulations tend to occur.

The gold market shrugged off this sudden drop. Prices started to rise again towards $1,100. As it neared that level, another attack quickly knocked down the gold price by $7. After this, the gold price again started to climb, closing on the COMEX just under $1,097, a new high (ignoring inflation). The ACCESS market, which begins trading a half hour after the COMEX closes, saw gold prices reach the $1,100 level at one point last Friday.

When Asian markets began trading Monday morning (Sunday night in the U.S.) the price of gold quickly topped $1,100 and stayed there during European markets. It remained above that level in U.S. trading on Monday.

Now that gold has reached $1,100, what next?

For the next two weeks, there are relatively few economic developments that would call for the aggressive manipulation downward of the gold price. It is possible that the price of gold may see significant gains soon. The reasons behind the rise in the gold price, despite tremendous suppression efforts over many years, have not been cured or resolved. In fact, the economic conditions have gotten worse. So, while it is always possible for a temporary profit-taking retrenchment in the price of gold, the prospects are overwhelmingly in favor of much higher prices in the near future rather than any long term decline.

The references to the price of gold rising to all-time record high levels are misleading. There has been significant inflation since gold peaked at $850 in early 1980. Using the current government statistics on inflation, the price of gold would have to reach (depending on whose calculation you use) somewhere between $2,100 and $2,600 just to match the 1980 record of $850. John Williams, whose work I cited above, notes that the U.S. government has changed the way it calculates the fluctuation in consumer prices. By his calculation, using the government’s 1980 methodology, the price of gold would have to reach about $6,500 to really represent a record high price.

When you realize that the price of gold, even at $1,100, is still far below its inflation-adjusted past record high, you can more easily understand why the price of gold has a lot of potential for a major increase.

David C. Harper, editor of Numismatic News recently posted a column on Numismaster where he related an e-mail exchange between someone concerned that my own columns were too much gloom and doom and also too politically oriented. You have to put my columns in context. People with significant investments in gold or silver have been generally very happy for several years. When customers are selling their precious metals lately, they are almost all cheerful at the profits they are realizing (of course, you have to keep the effects of inflation in mind).

I became a coin collector in 1964, as did almost everyone in my family. After sorting some silver coins out of change, I made my first gold and silver bullion-coin purchases from a coin dealer in 1973. I realized a huge profit when I cashed out in 1980. My ability to make a profit trading precious metals is one reason I became a coin dealer myself in 1981. I profited by avoiding purchases when the market was weak (most of the 1980s and 1990s) and by swapping between gold and silver when the ratios went to extremes.

My company’s past newsletters have frequently included selling or trading recommendations. For instance, I don’t recall any other coin dealer who matched our recommendation of selling 1982 one- ounce gold Pandas in August 1987 when they were trading for more than $4,000 each. I have been consistently bullish on gold and silver prospects for the past several years during a time when their price increases have far surpassed that of the stock markets or the value of the U.S. dollar.

After carefully studying a myriad of factors that affect precious metals markets, I remain just as bullish today as I have been for the past several years. However, I reject the label of “gold bug.” I think the ideal form of money should be decided by the free market rather than by politicians. It just so happens that gold and silver have proved to be a nearly ideal form of money over thousands of years. We are approaching a time when they again may play a major monetary role. But I don’t know that precious metals will always be an ideal form of money.

As for being political, I have consistently attacked bad government policies no matter which politician has been in office. As I understand the American political system, I don’t think it makes that much difference which of the two major presidential candidates wins the election, as the general results will be roughly the same no matter who holds the office. My objections to political actions are based on their content, not the identity of the particular politician.

By the way, my bullish expectations for gold and silver do not carry over to platinum or palladium. So, I don’t recommend all of the standard precious metals. While platinum and palladium may appreciate from now into the future, I expect gold and silver to far outperform them. Even though the price of gold has topped $1,100, don’t start cheering until at least $1,500.

P.S. The other three times during the day that you tend to see gold price suppression efforts are 1.) at the opening of the London market (4 a.m. EST/3 a.m. EDT); 2.) whenever some particularly horrible economic news is being released by the U.S. government, and 3.) during the thinly traded ACCESS market after 2 p.m.


 



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