By Patrick A. Heller
July 26, 2011
The COMEX August 2011 gold options expire today, July 26. As of July 25, there were still open 20,000 call option contracts (for 100 ounces of gold per contract) at a strike price of $1,600 per ounce. If the price of gold at about 4 p.m. Eastern on July 26 is more than a few dollars above $1,600, (it is about $1,611 as I write this about 11 a.m. Eastern on July 26), these call options could be exercised to create an instant demand for the delivery of 2 million ounces of gold. Such a development would quickly push up gold prices.
The most likely tactic that will be used to try to push down gold prices on July 26 will be to first push down the price of silver. On July 18, there was a single sale of 50,000 COMEX silver contracts (representing 250 million ounces – about one third of annual global mine production) which was an obvious attempt to suppress prices.
That tactic failed. So, don’t be surprised if instead there was an increase in COMEX margin requirements announced on July 26. While the U.S. government may successfully manage this immediate crisis, it will only be a temporary stalling tactic. Look for silver prices to reach even higher levels by the end of the first week in August at the latest.
Before July 26 as a result of the growing fear that global finances are close to the edge of collapse, over the prior week the price of gold reached new all-time high prices almost every day, as measured in U.S. dollars. Silver again topped $40.
For political survival, politicians cannot afford to let gold and silver continue to rise. But the tactics used by the U.S. government and its trading partners and allies for suppressing prices over the past few weeks have not worked. There is an imminent problem that could blow precious metals prices wide open today.
As I write this, pretty much all forms of physical gold and silver bullion-priced products are readily available, despite the surge in buying demand in the past week. I’m not sure how long this availability will continue.
Regardless of what might happen today, a quick review of other significant events provides added cause for concern.
On Monday, the credit rating on the Greek government’s debt, already at junk bond levels, was cut three levels to the second lowest possible category by Moody’s Investors Service. In doing so, Moody’s stated that the latest Greek rescue plan will cause substantial losses for investors and amount to a default.
The emergency meeting last Thursday of the heads of state of the 17 European nations that officially use the euro issued a statement promising to stand together in solidarity and bail out all troubled member government debt. One of my European sources sent me a copy of the preliminary statement to be issued that was drafted the day before the meeting. The formality of holding the meeting simply allowed the heads of state to sign the document. The statement did nothing to change the reality of the debt problems of Greece, Italy, Ireland, Portugal and Spain. Instead, the meeting was meant to fool the public into thinking that a genuine solution had been adopted. Obviously, the public didn’t fall for this window dressing.
While this went on, matters have also deteriorated in United States. The truth of the matter is that, on an accurate accrual accounting basis, the U.S. government spent more than $7 trillion for fiscal 2010 with a budget deficit for the year of at least $4.5 trillion (see the USA Today article published online at http://www.usatoday.com/news/washington/2011-06-06-us-owes-62-trillion-in-debt_n.htm). This is far larger than the official report that the cash-basis fiscal 2010 budget deficit was “only” $1.3 trillion.
The politicians in Washington are wrangling over budget cuts of $2-$4 trillion over a 10-year period and are pretending that this will somehow prevent the financial collapse of the federal government. These won’t even cover 5-10 percent of the forthcoming budget deficits, to say nothing of managing pre-existing liabilities of more than $50 trillion. The politicians and bureaucrats refuse to discuss the true extent of expenditures and are getting a pass from the mainstream media about the seriousness of the problem.
The city of Central Falls, R.I., has made an offer to its police and firefighter retirees. They either will accept a 50 percent reduction of their pensions or risk losing close to all of their pension benefits when the city files for bankruptcy.
The U.S. government is heading in the same direction as Central Falls. It simply cannot afford to make good on even 50 percent of its liabilities. While continuing to collect Social Security and Medicare taxes, the federal government must cut expenditures by at least 65 percent simply to achieve a balanced budget. With pension and welfare benefits accounting for about three-quarters of the federal budget expenditures on an accrual basis, it is obvious where a lot of cuts will have to come from. Even if the federal government eliminated 100 percent of all expenditures (defense, interest on debt, Treasury, Justice, State, Interior, Labor, Education, Energy, Agriculture, Homeland Security and all the rest) other than for pension and welfare liabilities, it would require more than an immediate 50 percent reduction in the pension and welfare benefits simply to break even.
Remember, these are conservative, best scenario numbers. The actual numbers may be much worse. It gives me no pleasure to point out that the U.S. government is broke. Public fears are growing over the relatively insignificant squabbling over a minor increase in the U.S. government debt limit that will do virtually nothing to address the dire financial position of the federal government. When the public learns the truth about how poor the nation really is, it is entirely possible that there will be civil unrest.
Just look at some of the scary statistics:
• The Bureau of Labor Statistics reports that only 58 percent of civilian non-farm working-age Americans have jobs. This is the lowest percentage in decades.
• Only 5 percent of American households have seen their incomes increase enough since 1975 to cover the rising costs of housing over the past 36 years.
• Right now, American families are about $7.7 trillion poorer than they were in early 2007, thanks to the falling values of the U.S. dollar, residential homes and poor stock and bond markets.
• Despite trillions of dollars spent fighting poverty since 1964, 21 percent of all American children live below the poverty line.
• More than 44 million Americans are collecting food stamps, er, debit cards.
• Newsweek reported that nearly 20 percent of all American men from the ages of 20 and 54 do not have a job today.
Also keep in mind these two historical facts. First, no government in history has ever successfully inflated its money supply (such as by quantitative easing) with the result that prosperity returned. Second, no government has ever borrowed its way out of debt.
These are the two means by which politicians in Washington are pretending that they are solving the financial problems that were created by past Washington politicians. These policies have not worked in the past, they are not working now and they will not work in the future.
Unfortunately, I don’t have any confidence in a political solution to all the financial crises. Instead, it will be up to each individual to protect his or her wealth as best they can. Owning gold and silver are excellent options toward this end. It would also make sense to stockpile non-perishable foods and other necessities.
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).