Precious Metals Month in Review: December 2013, by Steven Cochran

Welcome to SurvivalBlog’s Precious Metals Month in Review, by Steven Cochran of Gainesville Coins. Every month, we’ll take a look at the “month that was” in precious metals, covering everything from price action, to the information that’s driving the numbers.

December in Precious Metals

December is traditionally a slow month for precious metals, and the second-best month for stocks. This trend was amplified this year, as we saw lots of good economic reports from Europe, China, and the U.S. The stock markets, already hitting highs fueled by central bank money printing, sucked cash out of bonds and the precious metals market as everyone tried to get a piece of the action. This had gold around the $1,250 level to start the month.

The second week of December saw the U.S. Mint ship out the last of the 2013 Silver Eagle bullion coins (nine days earlier than last year) to cap the best year ever in sales; and the U.S. Congress actually come to a budget deal of sorts. It didn’t touch Social Security or other hot button issues, but everyone proclaimed it was proof that Congress could actually get something done. Precious metals shot to their high point of the month on the news, even as the dollar also advanced (usually a drag on commodity prices.) Stocks took this as pretty much clinching the chances of the Fed deciding to give Chairman Ben Bernanke a taper as his retirement gift.

The Fed followed through on the 18th, and reduced the $85 billion a month in “money printing” by $10 billion. That’s only a 12% reduction, but as the Congressman once said, “a few billion here, a few billion there, and pretty soon you’re talking about real money.” Precious metals hung tough in wildly oscillating trading immediately after the announcement, but was later sucker punched to the $1,200 level, where it spent the rest of the month.

Stocks worldwide went berserk, setting new records, because the Fed promised over and over to keep benchmark interest rates at or near zero at least through 2014, even if unemployment dropped under 6.5%. It was about this time that rumors started swirling over Stanley Fischer being named to the #2 position at the Fed, when Yellen moves into the chairmanship. Fischer was Bernanke’s doctoral thesis adviser, and also taught ECB Chairman Mario Draghi and many other central bankers.

Most recently the head of the Bank of Israel, Fischer has also held top positions at the IMF and the World Bank. He is noted as an expert on hyperinflation, which may be one reason Obama offered him the copilot’s seat at the Fed.

Market Buzz

Rumors are increasing that the Indian government will ease import restrictions on gold, even as the 10% import tax remains in effect. The domestic jewelry industry has almost been wiped out, and smuggling is bringing in hundreds of tons of gold that the government is not collecting taxes on. National elections are in May, and the ruling party is now about as popular as Congress is in the U.S., so this would be a logical action to take to improve their chances of staying in power.

Supporters of “hard money” are standing by the fundamentals, as Western quick-money speculators sell their physical gold to China. Eric Sprott for example, said in a recent interview “If you believe you’re right, and the data says hold your ground, you hold your ground. Normally, there’s a pretty big payday at the end.” Some industry watchers are speculating that China’s central bank will reveal how much gold they really hold next year, as it seems they do so every five years. The last official report was for 1,054 tonnes in 2009, so 2014 would mark five years from that report.

On the Retail Front

Even though all the talking heads are going on about how no one wants to buy precious metals any more, the story on the streets is much different. Retail investors have pushed the sales both the American Silver Eagle and Canadian Silver Maple Leaf coins to new record highs this year. The U.S. Mint has announced that the 2014 Silver Eagle will not go on sale until January 13th, and that supplies will be allocated (rationed.)  Pre-orders for Silver Eagles are already a best-selling item.

The Royal Canadian Mint has brought new security features first introduced on the Gold Maple Leaf in 2013 over to the Silver Maple Leaf for 2014. The Mint recently won a Coin of the Year award for implementing similar features on their circulating $1 and $2 coins. In addition to the micro laser-engraved security mark (what some people are calling a “privy mark”,) the entire background of the new Silver Maple Leaf will have a radial line design constructed to make counterfeiting much more difficult. You can see images of the new Silver Maple features here.

Looking Ahead

Looking at the fundamentals ahead, this is what we see:

Asian demand for gold was sated in large part by outflows from Western gold ETFs in 2013. The amount of gold sold by ETFs for the year equaled 800 metric tonnes, 25% of global production. This is a trend that physically cannot continue, because the ETFs have a finite amount of gold. Since that gold is being sold to China and India, it will not come back onto the market. Where will these ETFs get gold once the price starts to rise again?

Another drag on gold supply next year will be the fact that gold prices are now at or below the all-in cost of production for many mines. Expect more mines to reduce production or even close unprofitable mines. This will lead to severe labor unrest in nations with high labor costs, like South Africa.

This may also lead to China buying even more gold mines in 2014. Chinese companies, using loans from the government, have bought up $4 billion worth of gold mines and mining companies in the last two years. While other mines are reducing production, these Chinese-owned mines are expanding production on orders from Beijing, and shipping it all back home to China. This reduces the amount of gold on the open market, but still does not satisfy all of China’s gold demand. China is now the world’s largest consumer of gold, even though it is also the world’s largest producer of gold.

A third factor that may reduce global gold supplies is the law passed recently by Indonesia’s parliament, demanding that all ore be smelted in-country instead of being shipped out raw. This presents a problem, as there is only one copper smelter of any size in the country, and Indonesia is the world’s largest producer of tin and copper ore. The Indonesian executive branch knows that this law is suicidal for the country, and is trying to find ways to help the mining companies work around it. Freeport, which runs the world’s largest copper mine at Grasberg, said that production will fall to 20-30% of maximum if the law is not amended or repealed, meaning the loss of 30,000 local jobs. Grasberg produces 3.2 million oz of gold a year as a by-product of copper mining, and this law may mean a shortage of 840,000 oz on the global gold market.
We see retail investment demand for silver continuing to grow, after a record year in 2013. If someone tells you “oh, that’s because of the price crash,” remind them that the U.S. Mint sold out of Silver Eagles in EIGHT DAYS when the new 2013s were introduced in January. That was 7.49 million ounces of Silver Eagles sold when silver spot price was above $30/oz.

Inflation will be the “monster in the box” in 2014, as the Fed seems blind to the fact that it is its own policies that have the Big Banks holding on to quantitative easing money, instead of lending it out. Since the Fed has artificially suppressed benchmark interest rates, the Big Banks have parked some $2.5 trillion in QE money back at the Fed for a guaranteed return, instead of lending it out. The big Wall St. banks earned $6.25 billion last year in interest from the Fed, on cash the Fed itself printed in the hopes it would improve the economy.

Instead of fixing the problem at its source and getting the banks to actually lend that money, some economists at the Fed want to try and raise the inflation rate on purpose, thinking that they can make it stop rising when they want to.

Dallas Fed President Richard Fisher was shocked by the idea, telling a crowd “the idea of ramping up inflation expectations from their current tame levels strikes me as short-sighted and even reckless.” Fisher said that the long-term inflation dangers that the Fed has already caused “will surely test our capacity to manage policy going forward.”

As far as official inflation rates, they have been changed in the same way as unemployment rates have, in order to hide the true condition of the economy (Check the old U6 unemployment rate, which includes unemployed people who can’t find a job, and compare it to what the government reports.)  Brent Johnson of Santiago Capital recently told people “If you believe in math, buy gold.” He explains that inflation is nested in the stock market and real estate bubbles.

More and more people are expressing concern over the stock market and real estate bubbles based more on euphoria and greed than fundamentals. In addition to Reagan’s budget director David Stockman, this year’s co-winner of the Nobel Prize in Economics Robert Shiller warns of bubbles in both real estate and stocks. Shiller is famous for predicting the “dot com” crash and the real estate crash.

The taper is a tiny drop in the bucket, and the budget deal in Washington did nothing to fix any real problems. With ever-expanding national debt, and a China that is signaling it really doesn’t want to keep buying U.S. debt, dollar devaluation grows closer.