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The Bullion Report

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May 4, 2011 in 'The Bullion Report'

Tip of the IcebergTip of the Iceberg

This week started out with big news on the world front. After a decade, US forces have finally found and killed the mastermind behind the September 11th attacks. The relief and closure this brought the general public was met with an equal amount of exuberance in the financial world. Suddenly fear premium seemed to be evaporating all over the place. At the risk of sounding like a broken record, I worry if this isn’t a bit premature, maybe a touch of hubris coloring the commodity sell-off? The War on Terror was just the tip of the iceberg.

The idiom I am invoking is based on the notion that the top of the iceberg, the tip that is poking out above the waterline, is just a fraction of the frozen behemoth. For precious metals investors the “hidden” quantities behind the massive price move in gold are all of the fundamentals that were not hiding out in a cave or mansion in Pakistan over the last decade. This includes the current inflation, limited growth, rampant money supply, and massive national debt. 

Inflation is probably the biggest chunk of the fear premium that should still be left in these markets. The second wave of quantitative easing from the Federal Reserve might be meeting its end, but enough cash has been floated to engulf the dollar. Anyone aiming to hedge against the monetary debasement probably took the sensible turn towards gold and silver months ago. Now the average person looking at the prices of groceries and gasoline is wondering if they shouldn’t do the same. Ben Bernanke tried to own the current price increases, saying that the core inflation was near the Federal Reserve’s goal. Unfortunately, it is hard to tell that to the consumers who are still trying to makes heads or tails out of the high unemployment levels, poor housing markets, and staggeringly bad growth in the United States. Cost of living increases are bad enough when there are jobs and prospects for improvements. The initial news of bin Laden’s death might roll over into consumer confidence, giving it a temporary boost. That could be a glimmer of hope for retailers who are also grappling with increased costs. It should be noted that higher gas prices were just the start of price jumps in 2008. That $4 a gallon price at the pump translated into fuel surcharges and a host of other increases for consumers. That tips the scales back towards fear in my eyes. 

Speaking of Bernanke, his checklist of accomplishments during the financial crisis that began in 2008 appears to have boosted the stock market and corporations more than the overall growth and recovery of the nation. Don’t get me wrong – the bank bailouts and stimulus kept things from total collapse, but as the GDP release following Ben’s press conference showed, the first quarter of this year hardly delivered stellar growth. In fact, things slowed down compared to the final quarter of 2010. Where has the recovery gone? Fed members will argue that recovery will be slow, but I would venture a guess that the stimulus and resulting inflation are just starting to work their magic. Of course, no amount of trickery is likely to save Congress from raising that debt ceiling.  

Treasury Secretary Timothy Geithner recently tried to sell the idea that there were “extraordinary measures” which could help the United States hit the critical limit on debt. Now it appears as though the fight to raise that limit is nearly upon us. A flurry of paper and numbers should come into play ahead of the August deadline, and lawmakers will move money from this place to that trying to think of ways to keep the US out of default. To do otherwise, as Timothy observed, would be “catastrophic.” 

Summary 

The US may be heading into the home stretch in the War on Terror, which is a good thing. The goal line that is a little further off – into the distant horizon by my calculations – is the recovery needed to erase the rest of the fear premium built into precious metals. Gold took off for good reason, there was a strong desire for a market in which investors could look for unadulterated asset preservation. I don’t see any reason why that fundamental should have changed. This week’s employment report will likely reinforce that notion. The US and other countries are still wrestling with inflation issues. Food and fuel prices are marching higher, and those increases inevitably spin into other goods and services, further taxing the average American. More pressure on the people should translate into less selling pressure in precious metals markets. 

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.