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Putting some Pop into that Dirty Old Gold
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(March 21, 2009) Gold prices reasserted themselves with a vengeance this week, soaring some $80 in 24 hours with the announcement on Wednesday that yet another trillion or so of our dollars were being created to benefit large suffering corporate entities in a further act of unrequited charity on our behalf.
Big moves up in gold are always exciting, and seldom signify anything good.

Before the March 18th Gift from Geithner, gold had virtually gone into sleep mode since this time last month, drifting downward some 10% following its near-achievement of the $1,000 mark (for only the second time ever) on February 20th.

On Wednesday morning (3/18/09), it looked like the latest correction was working its way into a selling climax, with business being done as far south as the low $880s. Then came the explosion. In the space of about five minutes, gold sailed from the $892 mark to the $920s, continuing its climb in the next few hours of trading to hit the $961 mark.

Those of us staring at a gold or dollar screen, without a clue what was going on, could only imagine that either the Fed had made a momentous announcement, or a major American city had been invaded by hostile aliens, or at least pummelled by a large meteor.

In fact, the dollar’s swoon and gold’s turn-on-a-dime surge coincided with Secretary Geithner’s announced commitment of some $1.2 Trillion in further liquifications and bailouts, of exactly whom, as has been the pattern since last September, we are not to know.

Think about that number of March 18th: 1.2 trillion dollars ($1,200,000,000,000.00). For those of you keeping score at home, that number is a dozen hundred thousand million dollars. Assuming that there are one hundred million US taxpayers, that amounts to $12,000.00 per taxpayer, that day. And don’t ask where it’s going, because not only will they not tell you, but also you probably don’t want to know.

As Secretary Geithner spoke, the dollar fell off a cliff while gold rose some 8% in about an hour’s time. It turns out that neither aliens nor meteors were involved, but Peter Schiff, in his 3/20/09 article “The Mother of All Bells,” contends that Wednesday’s earthshaking event was even more significant:

“While nearly every facet of America's economy has been devastated over the past six months, our national currency has thus far skipped through the carnage with nary a scratch. Ironically, the U.S dollar has been the beneficiary of the global economic crises which the United States set in motion. As a result, our economy has thus far been spared the full force of the storm.”

Schiff continues, “This week the Federal Reserve finally made clear what should have been obvious for some time - the only weapon that the Fed is willing to use to fight the economic downturn is a continuing torrent of pure, undiluted, inflation. The announcement should be seen as a game changer that redirects the fury of the financial storm directly onto our shores.”

Jonathan Laing also saw this announcement as a ‘game-changing’ event, as outlined in his article “Wednesday Changed Everything” in the March 23rd edition of Barron’s. However, his outlook on inflation/deflation is the direct opposite of Mr. Schiff’s:

“This is the beginning of a financial surge by the Fed that will not only bolster the economy by bringing long-term interest rates down, but also augurs well for stock prices in the months ahead.”

One might quibble that long-term rates are pretty low already, and point out that stocks lost ground in the two days following this week’s ‘game-changing’ announcement, but instead we’ll let Mr. Laing finish:

“…Concern seems miscast over the Fed’s printing new money and thereby creating inflation and weakening the dollar. Looming deflation is now the enemy. Fed buying is the only game in town in the wake of the seize–up in private credit markets and the huge wealth destruction that has taken place in both the corporate and consumer sectors. Now, at least, there’s some hope for both the economy and the stock market. And it’s about time.”

To sum up, the financial “surge” by the Fed brings “hope.” And, Mr Laing might add, if wishes were horses, we’d all be cowboys.

The U.S. Mint, in the meantime, continues to fail utterly at its congressionally mandated task to produce bullion Eagle coins in gold, silver, and platinum to meet public demand. Once again, we have had to suspend sales of gold Eagles due to scarcity. During the week of March 16th, the Mint released fewer than 10,000 1-ounce gold Eagles against a weekly demand of probably five times that many coins.

The scandalous state of the Silver Eagles program is even worse, and has been for over a year. Silver Eagles are being produced at a rate that is so far short of actual demand that authorized distributors who pay the Mint’s charge of $1.40 over spot for the coins have, since this time last year, been able to command a wholesale average of $3.50 over spot. Although this allows the Mint's designated distributors to enjoy lush profit margins, the net effect is to push retail prices for silver Eagles into the $20 neighborhood for most US end buyers. It’s a simple supply-and-demand equation. The Mint is not turning out enough supply, and demand has soared.

Silver Eagles, which as recently as 2007 were readily available in quantity through retail channels for less than $2.00 over spot, now cost the US public more than double that premium. That’s not right, and for over a year now the Mint has failed to effectively deal with the problem.

The rest of the US Mint’s bullion programs have been ignored completely. Gold Buffalo .9999 gold bullion coins haven’t been produced this year, nor have fractional-sized gold Eagles. And as for platinum Eagles, which would sell like hotcakes were they available – well, the US Mint hasn’t emitted the first whisper about them this year.

Basically, we are in the middle of a worldwide frenzy of retail demand for precious metals bullion products. So where is the US Mint while all this is going on?

Paul Gilkes, in his article in the 3/16/09 edition of Coin World entitled, “Blank Shortages Continue for Bullion Coins,” reports that:

“The ongoing difficulty in the U.S. Mint’s ability to obtain sufficient blanks to meet demand for its American Eagle gold and silver bullion coins is continuing to delay the start of production of other versions of the coins. Delays are also being encountered for the production of all versions of American Eagle platinum bullion coins and American Buffalo gold bullion coins.”

Unfortunately for US buyers, our once-mighty Mint has outsourced all refining and coin blank-preparation work to outside contractors such as the Royal Canadian Mint and the Perth Mint, both of which are swamped with demand for their own in-house produced bullion products.

As a result, the US Mint, although capable of striking many more coins than it currently produces, has to patiently wait for outside sources to find time to do the marginally-profitable work of turning out regulation precious metals planchets for the US Mint’s use.

Is it any wonder that the flow of blanks from foreign mints is so sporadic? After all, why should they even bother – in this booming market, the major bullion-producing government mints are able to sell, at a higher markup, every precious metal coin of their own design that they can produce. The US Mint, a very exacting customer that depends utterly on outside vendors to produce coin blanks from their excess capacity when business is slow, finds that lately there is no excess capacity.

We are now experiencing the inevitable downside of our Mint's outsourcing its refining and planchet production: In an era of unprecedented demand, the US Mint is standing last in line for world precious metals supplies.

Of course, those other Mints distribute their wares in the US, and over the past few months we have sold far more Maple Leafs from Canada and Pamp Suisse .9999 gold bars from Switzerland than gold Eagles, as supply comes into the US to meet demand.

But the fact that Eagles have not been consistently available at reasonable markup is more than just a loss of market share by our Mint, and an inconvenience to American bullion purchasers. Arguably, the psychological effect of the Mint’s failure to produce bullion to meet demand is contributing to dollar instability.

It would be helpful if the Treasury Department, of which the Mint is part, started to recognize the importance of the Eagles bullion program. As we wrote to Secretary Geithner in January, and repeat here:

“The issue goes deeper than simple inconvenience for bullion buyers, and, yes, bullion dealers. The persistent shortages of silver Eagles for most of 2008, and gold Eagles for the final four months of 2008, (now continued in March of 2009-ed.) engendered a mind-set among the precious metals crowd that supply was simply not available while precious metals prices were tumbling. In short, they saw conspiracy, manipulation, and reasons to question even the legitimacy of the US Comex market itself.”

The public perception of a dichotomy in the gold/dollar markets is anathema to the Treasury’s role in defending the dollar against all enemies. People simply have less faith in dollars if they cannot be spent on Congressionaly-authorized US Treasury-produced gold and silver coins at reasonable premiums over spot market prices.


 But enough of all this serious talk. Say, how about that Dirty Gold campaign, anyway?

Christine Lennon, wrote in an April supplement to Time Magazine, an article entitled “The New Gold Standard” with the subtitle, “Concerned about dwindling resources, fine- jewelry designers are taking a shine to reclaimed gold.”

In this article we are exposed to the contradictions of those who claim that the refining of scrap gold is a new, green, environmentally correct miracle – endorsed by celebrities! - that will save the earth from the ravages of gold mining.

Just from a public relations standpoint, it’s an astounding act of sheer chutzpah to call freshly mined gold ‘dirty gold,’ and at the same time label the gold recovered from pawn shop debris and dental waste as “eco-gold.”

“Few people want to think of the ring on their finger, which leaves an average of 20 tons of mine waste, having such an enormous environmental and human impact,” Lennon quotes Payal Sampat, the director of the No Dirty Gold campaign.

Of course, what starry-eyed couple doesn’t think that their love is at least worth the crushing of twenty tons of rock in order to extract the pure gold that gives the token of their esteem its sparkle? Besides, a lot more people earn a living at mining than working in gold refineries. Let the engaged couple think kindly of the jobs in mining that their purchase will provide.

The essence of the Dirty Gold campaign is that mining gold for mere jewelry is not worth the costs to the environment. Instead, the morally ‘better’ gold is from the past, where the strife, struggle, slavery, crime, and destruction of wilderness committed in its obtaining is now, as the kids say, history.

So, is it really morally superior to buy gold that you don't know where it has been?

And how romantic is it to buy jewelry made from gold which has been recently recycled from other couple’s wedding bands, surrendered ghetto bling, Grampa’s old dental work, or gold recovered with toxic chemicals from computer scrap, rather than newly-mined gold?

To put it plainly, the mining of gold for eons has meant new scars in the earth, more pollution of waterways, and jobs for those who could use the money to feed their families. As with many human endeavors that don’t always seem fair or pretty, gold mining simply is what it is.

And since gold is completely fungible once refined, eco-conscious Americans choosing ‘reclaimed’ gold can feel all warm and fuzzy wearing their righteous bling, while the mining and selling of gold worldwide goes on unabated.

 

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