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Why Gold And Silver Are Declining With The USD

By Doug EberhardtCommoditiesDec 18, 2012 05:49PM ET
Why Gold And Silver Are Declining With The USD
By Doug Eberhardt   |  Dec 18, 2012 05:49PM ET
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Tuesday we saw gold and silver take a big hit. Normally that would be the result of a stronger dollar, which also took a big hit. So what’s really going on? Why are gold and silver prices falling along with the dollar? Just before the last fed meeting I wrote, Thoughts On Gold Price Manipulation. It was at that meeting, recall, that the Fed announced more Quantitative Easing, tying the continuation of future easing to a 6.5%-or-below unemployment rate. Gold immediately shot up $11 on the announcement, to just over $1,715 an ounce. Then within the next 24 hours the bottom fell out. As of Tuesday, gold has slipped to just over $1,660 an ounce, its lowest level since August.

That price decline is occurring despite soaring American Gold Eagle sales at the U.S. Mint for the month of November and a huge inflow of $282 million into ETFs like SPDR® Gold Shares (GLD).

Spot Gold
Spot Gold

Fed Eases More While Gold And Silver Prices Fall?
So, the Fed eases more and announces (or says what it said last month about QE infinity in a different way) a tie-in with lower unemployment, along with soaring gold sales at the U.S. Mint and Precious Metal ETFs and the price of gold and silver go lower? And at the same time the stock market moves higher? I have to laugh at this price action. My advice is still to dollar cost average into your gold/silver allocation and just be patient. It’s the tortoise versus the hare approach to investing in precious metals and eventually the tortoise will come out ahead. Naturally, the result of the tortoise winning is the hare (Federal Reserve) losing as we’ll see below.

Some will say their is some manipulation occurring as it’s the last day before the Committment of Traders (C.O.T.) report comes out. That shorts like to play havoc with longs during this time. Technically, this is possible. We have seen the market manipulated many times the last month, early in the morning. Unfortunately for many gold and silver buyers, it’s been manipulated lower during these price movements.

Some Things Don’t Change
As much as there may or may not be manipulation in the gold and silver markets, the national debt keeps going higher and the Fed won’t have anyone to buy the trillions of treasuries they will have to dump at some point. But they do believe they can print forever without consequence. Gold is the insurance against the inevitable. But at least I can call it like I see it and set myself apart from the “gold to the moon” gold dealers. While I am confident the price of gold will move higher, I have to see that data before me and make assumptions on what I see.

While all the talk is about the upcoming Fiscal Cliff, it’s just a side show. Congress won’t make any cuts. The debt limit will be increased and Obama’s $20 trillion of future debt limit will be taken out. The interesting thing to me is people still believe the Euro story (I don’t) and as such the dollar is falling but gold and silver prices are falling too. The folks at Kitco don’t know what to put in their headlines any longer as a reason for the gold and silver prices falling. Perhaps they need to start using the “m” word.

I waited this long to use the word manipulation in one of my articles and I can say that I am confident it’s occurring. What could make matters worse is if the Euro did start to fall below 1.20 and test it’s all-time lows (see chart below). It is up against resistance as we speak and things just aren’t magically getting better in Europe. By default the dollar would move higher and the manipulators may just get their chance to drive gold lower, laughing all the way to the bank with their profits. Don’t say it can’t happen, despite the evidence to the contrary. Smart investors will dollar cost average into a precious metals position and just sit tight. Further dips could come. Market Makers love to move markets they can control. Large banks that trade the precious metals market, like J.P. Morgan Chase, can wreak havoc on how gold and silver should be acting.
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European Banks Not Faring As Well As U.S. Banks
I first started pointing out the problems in Europe in an article I wrote in July of 2010; European Bank Stress Test Results Prediction. The results of that stress test were positive overall, but the bank balance sheets told me a different story.

How have banks in Europe done since that 2010 article? A few recent Euro Zone headlines follow:

  • Spain banks bad loans hit new high in October
  • Italian Banks Plunge on Monti Resignation Plan
  • Bank of Portugal Warns of Rising Credit Defaults
  • Europe’s Headway on Greece, Banks Masks Deeper Divisions
You don’t see these types of headlines about banks in the U.S. And please note, these countries can’t individually throw money at their banks as every bit of monetary stimulus has to come from the European Central Bank (ECB). The ECB can’t be as covert as the Federal Reserve.Despite all of these European banking issues still occurring, the Euro is actually higher than it was during that first European stress test in 2010. Why? Because the ECB is throwing as much money as they can at the problem. It’s the same thing the Fed is doing here in helping their friends the bankers make up for their past sins allowing U.S. banks to obtain the highest profits in six years. Of interest, the Fed did announce it would draft tough capital rules for non-U.S. banks…in July of 2015. The Fed is of course hoping by then their investment in the ECB will have paid off just as their investment in Treasuries through Quantitative Easing to infinity. Good luck with all that! You sure as heck won’t see Japan and China bailing you out as they have in the past. Those days are over.

The Bottom Line
Yes, the Dollar has issues. Huge issues. But the Euro situation I see as a bigger issue at the moment as noted above. The Fed and ECB will throw money at the banks in blatant attempts to fix them. As pointed out above, the banks here in the U.S. have had the best profits in 6 years. But if things were so well here in the U.S., why are banks playing the derivatives game with more sub-investment grade derivatives on their books today than at the height of the 2008 crisis? Who will be the counterparty to these sub-investment grade derivatives when they come due? The Fed? Hahaha! Who was the counterparty to J.P. Morgan’s $5 billion loss earlier this year? J.P. Morgan was. Additionally, why don’t banks mark to market the assets on their books today if things are so great for them? Why does the Federal Accounting Standards Board (FASB) play favor to them and no one else by letting them keep these assets at 2006 prices? Is this “business as usual?” Is this the same standard the courts dictate as to what a “prudent man” would do that investment advisors have to abide by?

A prudent man should be buying gold as insurance against the fact that the lender of last resort, the Fed and the ECB, as well as the Bank of Japan as you’ll see soon enough, can’t keep playing the game they are playing, waiting on the miracle of an improved economy. They are in too deep and there is no way out but pain for all of us. At least gold, as a store of value and “real” wealth, will protect your portfolio.

My next article will be an expansion of Chapter 4 of my book, Buy Gold and Silver Safely, which has been a good road map to what’s occurring in the economic and investment climate. In fact, I am turning that Chapter into a new book called, Illusions of Wealth, due out the first part of next year.
Why Gold And Silver Are Declining With The USD
Why Gold And Silver Are Declining With The USD

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