Sudden Temporary Gold And Silver Price Drop; Retail Sales Soar

Overnight Monday in the US, during Tuesday Asian and European market trading, the price of gold reached an all-time peak of $1,917 and silver topped $44. Then, the bottom fell out of both prices.

The timing of the drop was predictable.  The COMEX silver options expired Thursday.  Had the price of silver closed yesterday much over $42 that day, there would have been strong pressure for the immediate delivery of millions of ounces of silver out of the COMEX warehouses as owners of call options exercised contracts that were “in the money.”

Apparently, the US government gave orders for gold and silver prices to be suppressed to help minimize the supply squeeze.
On Wednesday, the Chicago Mercantile Exchange raised its margin requirements, just two weeks after its previous margin increase.

A margin increase forces leveraged owners to either put up additional immediate cash to maintain their holdings or else their positions will be liquidated.  Many leveraged owners are unable to provide instant funds, so invariably a higher gold or silver margin requirement results in significant liquidation of these particular assets.

That is exactly what happened this week.  Gold fell all the way down to just over $1,700 around the opening of US markets Thursday morning.  Silver hit a very brief low of around $38.30.  At the bottom, 34,000 gold options contracts (covering 3.4 million ounces of gold worth almost $6 billion) changed from being in a profit position early this week to a loss.

So, how did the general public react?  I don’t know about every other coin dealership, but two of the first four days of this week are among the highest retail sales days we have enjoyed over the past thirty years!  Both gold and silver have been selling well.  Since we offer such a wide variety of gold bullion-priced coins and bars, there was no obvious “go to” gold option.  As for silver, more than 90% of sales volume was for the lower premium US 90% silver coins.

The strong demand for silver caught wholesalers unprepared.  Some wholesalers are now quoting shipping delays up to two weeks for various brands and sizes of ingots.  Premiums have not yet started to rise, but it could happen if this buying surge continues.  Thus far, there really doesn’t seem to be any supply problems in quick delivery of gold bullion-priced coins and ingots.

This surge in physical demand helped the prices of gold and silver recover half way to their peak of early this week.

There are developing stories of other financial calamities that may come to pass.  For instance, I have heard multiple reports that many European banks are refusing to provide extremely short term loans to other European banks.  It was exactly this kind of liquidity crisis in 2008 that grew into the insolvency crisis just a few months later.

The US Dollar Index did not close today below 73.70 which would have been a technical signal for a quick sharp further decline in the value of the dollar.  But don’t relax just yet—the Index closed at 73.80.

With matters looking so poor for Bank of America, “somebody” persuaded mega-billionaire Warren Buffet to invest $5 billion into that company.  Don’t be fooled thinking that this is a straightforward investment by a savvy expert.  Although Buffet has always preached doing thorough due diligence before making an investment, he admitted that he made the Bank of America purchase within 24 hours of first contacting the bank.  Something doesn’t add up here.

I would not be surprised if there were behind-the-scenes protections for Buffet should Bank of America go belly-up in the next year.  You can bet that the taxpayers would be called upon to rescue Buffet.

Remember a few years ago when Buffet injected $5 billion into Goldman Sachs?  The Dow Jones Industrial Average fell 20% in the following three weeks, then fell another 20% in the following six months.  Will history repeat itself?

Of least importance was the speech today by Federal Reserve chair Ben Bernanke.  Most of his speech was simply repeating what he said three weeks ago—which itself was not really much of anything.  He vaguely claimed that the Federal Reserve has tools to achieve what it has failed to accomplish in the past four years.  If such tools really work, why weren’t they used before now?

Gold is trading at healthy premiums above the world spot price in China, India, and Vietnam, all among the largest gold consuming nations.  The premiums only exist because demand in those countries exceeds supply.

My column earlier this week speculated that we could experience far higher gold and silver prices as quickly as a few weeks from now. Even with the roller coaster ride this week, the prospects for a major increase still look good.

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