This week I provide you with the current status of Gold and Silver’s support and resistance levels, an update on the status of the Basel III requirements, and what I think is the real problem keeping Republicans and Democrats from reaching a deal on the Fiscal Cliff issues.

GOLD

Gold’s volatility last week was much greater than we have seen recently. The high/low had a $47 price range, with a high of $1,752.30 on Monday and a low of $1,705.50 on Wednesday. Trading volume for the week was heavy, motivated by Gold getting very close to the $1,700 per ounce support level. Much of this volatility was caused by politicians giving their opinions on the status of discussions on the Fiscal Cliff negotiations. Gold closed the week, and the month of November, at $1,712.70 per ounce, down $38.70 per ounce for the week, and virtually unchanged for the month.  

WHAT ISN’T BEING SAID IN WASHINGTON ON THE FISCAL CLIFF DISSCUSSIONS

Why are the Republicans so insistent that entitlement reforms be part of any Fiscal Cliff deal?

It is because the actual Federal Government entitlement liability for Social Security, Medicare, and Federal employees’ future retirement benefits already exceeds $86.8 trillion, or 550% of the GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like this figure is used in calculating the current deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.

In the most recent Trustees’ report dated April 2012, the net present value of the unfunded liability for Medicare is $42.8 trillion. The comparable balance sheet liability for Social Security is $20.5 trillion, and the unfunded liability for the Federal employees’ future retirement benefits is $23.5 trillion, making the total Federal Government entitlement liability $86.8 trillion. 

Both Democratic and Republican leadership understand that future borrowing of this scale could eclipse the capacity of global capital markets—and also bankrupt not only these entitlement programs themselves, but the entire Federal Government. The only question is what agreement can to be reached on entitlement reform to allow both the Republican and Democratic leadership to set new tax rates for the top 2% of income earners.

FEDERAL RESERVE DELAYS BASEL III RULES

Last month U.S. regulators at our Federal Reserve Bank delayed the effective date of the Basel III global agreement. One of the major conditions of the Basel III rules affects major bank capital requirements that were needed after the financial crisis of 2008. The rule delay could help big banks like J.P. Morgan Chase & Co., Citigroup Inc., and Goldman Sachs Group Inc., who must ultimately comply with the new financial requirements. In June 2012, the Fed said that some institutions had a long way to go to meet the new capital requirements. The 19 largest U.S. bank holding companies would have a capital shortfall of $50 billion if the new Basel III capital buffer rules that were proposed were to be made effective immediately, said a Fed official at the time.

There was nothing said in the Federal Reserve announcement about changing Gold to a Tier 1 asset for commercial banks with 100% weighting, rather than a Tier 3 asset with just 50% risk weighting as it stands today. The Basel III rules are potentially a double win for Gold in 2013. Currently, banks have a dis-incentive to hold Gold, while being encouraged to hold assets like equity capital, currencies, and debt instruments. With this potential change in capital adequacy requirements, bank purchases of Gold would drive up Gold’s value relative to other high quality qualifying assets. I believe that this should result in Gold setting new record highs (above $1,920 per ounce) in 2013.

SILVER

Last week trading in the Silver market was very exciting, with a $1.59 high/low price range.

With Silver closing the week at $33.28 per ounce, it was down $0.84 for the week, but up almost a dollar for the month of November. Although Silver tested and held above the $33.00 per ounce support level last Wednesday, it appears that Silver wants to trade in the $33 to $34.50 per ounce price range. $34.50 per ounce is the current resistance level.  The Gold/Silver price ratio has dropped in November to 51.46-to-1.

PLATINUM & PALLADIUM

Platinum was down only $12.50 per ounce last week, to $1,604.60, which is very bullish considering Gold dropped $38.70 per ounce. Palladium increased $20.60 per ounce in the same period, as we saw a physical shortage due to the South African mining problems. Platinum is now trading at $1,604.60 per ounce, an attractive $108.10 discount to the Gold price. Palladium closed the week at $688.20 per ounce.

RECOMMENDED INVESTMENT COMMITMENT AND DIVERSIFICATION

Precious Metal Commitment: Minimum of 35% of investment capital

Diversification: Gold 50%, Silver 40%, Platinum & Palladium 10%

Diversification includes 50% in long term investment quality rare coins and 50% short term bullion products

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All statements, opinions, pricing, and ideas herein are believed to be reliable, truthful and accurate to the best of the Stuppler & Company’s knowledge at this time. Stuppler & Company disclaims and is not liable for any claims or losses which may be incurred by third parties while relying on information published herein. Individuals should not look at this publication as giving finance or investment advice or information for their individual suitability. All readers are advised to independently verify all representations made herein or by its representatives for your individual suitability before making your investment or collecting decisions.