Precious Metal Commentary

March 8, 2010

Gold Prices Up To Six-Week High, Then Pulls Back On Greece's "Good News"

Commodity prices rose strongly last week, with crude oil reaching $82 per barrel on Friday and gold making a new six-week high at $1,135. Copper and silver also rose last week, due to supply disruptions in Chile. This morning, gold fell $10 on the "good news" that Greece seems to be addressing its debt problems, thereby reducing gold's immediate attraction as a "crisis haven."

• Gold 52 weeks ago (March 2, 2009): $923.75
• Gold's average price during 2010: $1109.20
• Gold's low for 2010: $1058 on February 5
• Gold's London high for 2010: $1162 on January 11

The Bottom Line: Gold had a great week, and so did stocks, as the world celebrated Greece's rescue!

"Forget Stocks" and "Buy Gold Every Month, Forever" - Dr. Marc Faber

Not only are multiple states near bankruptcy, but the U.S. Treasury is running dry, too (except for inflated "fiat dollars," our own brand of Monopoly Money.) Last Thursday, the noted economist and international investment advisor Dr. Marc Faber told CNBC that the Greek crisis should not take investors' eyes off the more important debt crisis in the United States and most of Europe.

Our states are in a bigger mess than Greece, he said, and they have larger economies than Greece. Faber said the U.S. Federal Reserve will eventually have to bail out some states, such as Illinois and California. "If you compare the Depression years, we didn't have credit cards and we didn’t have unfunded liabilities from Social Security, Medicare, and Medicaid," he explained. "In other words," he added, "in 10 years time, between 30% and 50% of tax revenues will be spent on interest payments on the government debt...and that will lead to a weak dollar."

To protect your portfolio against debt implosion, Dr. Faber told CNBC that most investors should "forget stocks" and "buy gold every month, forever." In a live interview last Thursday, now available on You Tube, he said that the quantity of gold "cannot increase at the same rate as you can print money, which will eventually weaken the U.S. dollar," Faber added this caveat: "I'm not saying that the dollar will go straight down, because other currencies like the euro are even worse at the present time. But, eventually if you print money," he said, "it will lose value."

Is the World's Debt Crisis Suddenly Over?

Gold fell this morning on the supposed resolution of the Greek debt crisis. The dollar fell to the euro when Germany and France vowed to back Greece, and the Greek government passed some austerity measures, but the problem in Greece is not yet solved, and Greece is really just a small microcosm of much larger debt problems in other nations - mostly in Europe, but also here in the United States. For instance, the economy of California (or New Jersey) is much bigger, and much closer to home, than Greece's economy, and those states face the same imminent debt crisis, without any financial or moral backing from the U.S. Treasury or any other White Knight.

Greece raised taxes and cut benefits, a necessary first step, but that will be met by widespread resistance, even strikes, while tax increases will hurt its economy. This story is not over. Greece raised its value added tax (VAT) by 2% to 21% and added a 20% tax increase on tobacco and alcoholic beverages. Paying a 21% "national sales tax" will certainly cut into consumption, especially since salaries and bonuses were also cut, and civil service pension costs were frozen.

While German Chancellor Merkel and French President Sarkozy gathered all the headlines for promising to "stand behind" Greece, they haven't sent any real money, just hot air. Perhaps a more typical response from skeptical Germans is the suggestion from two members of Germany's parliament, who said that Greece should sell some of its small islands to raise cash. Greece has around 6,000 islands, of which only 227 are inhabited, so there are plenty of empty islands to sell. In addition, the German tabloid Bild wrote an open letter to Greece about their state corruption: "Here in Germany, people work until they are 67 and there is no 14th month salary for civil servants. Here, nobody needs to pay a 1,000-euro bribe to get a hospital bed in time." Ouch!

But the rest of Europe can't afford to throw rocks: (1) Ireland has 13% unemployment and is suffering from deflation: Consumer prices are down 2.6% from a year ago, the biggest price drop in the euro zone. (2) Deflation is also brewing in Spain, where over 19% are jobless. According to the European Commission, prices in Ireland and Spain will keep falling in 2010: (3) Iceland held a weekend referendum on how to renegotiate the $5.3 billion they owe Britain and the Netherlands from failed Icelandic banks, and (4) Britain's household debt is now 170% of their overall annual income, higher than Greece or the U.S. The British government has a budget deficit of 14.5% of GDP, higher than Greece or the U.S., but they pay an interest rate more than 2% lower because the Bank of England bought the majority of the bonds it issued last year.

Fiat Paper Money vs. Gold in History This Week

On March 12, 1849, Congress authorized the minting of the first "double eagle" ($20 gold piece). A year later, on March 12, 1850, the first U.S. $20 gold piece was issued. It contained 0.9676 ounces of gold, valued at $20.67 per Troy ounce. (The previous largest coin was $10.)

Meanwhile, on March 10, 1849, future President Abraham Lincoln applied for a patent for a device to lift vessels over shoals by using inflated cylinders. He earned that patent in May, thereby becoming the only President to hold a patent. However, his more notable invention came 13 years later, on March 10, 1862, when Lincoln invented a new form of paper money, called "Greenbacks," to pay war debts in denominations of $5, $10, $20, $50, $100, $500 & $1000. On March 17, 1862: The U.S. Treasury sanctioned two issues of Greenbacks, which weren’t tied to any form of metallic backing. That irked conservatives and proponents of the gold standard, but that didn’t stop the government from releasing $450 million in greenbacks during the Civil War.

On March 14, 1900, the U.S. officially went back on the gold standard. Using a new gold pen, President McKinley signed the Gold Standard Bill. With the passage of that Act, McKinley's "gold bugs" finally beat the silver standard forces under William Jennings Bryan. Two months later, a child's book, "The Wizard of Oz" described the mysterious land of Oz (ounces), where a girl from Kansas with Silver slippers, marched down a Yellow Brick (gold bullion) road to the Emerald City.

On March 17, a two-tiered gold price scheme was negotiated in Washington, DC, at the first-ever "G-7" meeting (the "G" stood for Gold: The U.S. and the six European members of the London Gold Pool).

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