Welcome to SurvivalBlog’s Precious Metals Month in Review, by Steven Chochran of Gainesville Coins. Every month, we’ll take a look at the “month that was” in precious metals (PMs), covering everything from price action to the information that’s driving the numbers.
Major Factors Affecting Precious Metals
Of course, the thing that dominated the news in March was Russia’s invasion of the province of Crimea in Ukraine and annexation of the area into Mother Russia. Something, that got less attention but had just as much effect on gold, was the failures in China of “shadow loan” funds.
UKRAINE.
Russian troops poured into the southern Ukrainian province of Crimea in the pre-dawn hours of March 1st, in response to security worries following the ousting of pro-Russian Ukrainian president Viktor Yanukovych, which set off the largest international incident in Europe since the collapse of the Soviet Union. Gold gained strongly on safe haven demand, peaking at a six-month high of $1,392 an ounce in intra-day trading on March 17th. An estimated 20,000 Russian troops entered Crimea, taking over Ukrainian military and government buildings. After the Russian-installed Crimean legislature held a referendum to rejoin Russia, it became clear that only symbolic sanctions would be enacted by the West. Gold began to decline from its highs, but capital flight out of Russia had already topped $60 billion and landed a severe blow to an already struggling Russian economy. The Russian central bank has canceled its last four bond auctions due to lack of demand.
CHINA.
Another bullish factor for gold was the Chinese financial sector. After previously bailing out insolvent companies and “investment trusts”, the Chinese government finally made good on its threats and started letting them default. This sent shockwaves through the public, who had believed that Beijing would make them whole no matter what risky ventures they put their money into. This positive for gold was somewhat offset by evidence that the Chinese economy was slowing down. This put pressure on base metals, such as copper and iron ore, which bled through to silver and the platinum group metals.
EMERGING MARKETS.
Riots in Turkey returned to a fever pitch, as President Erdogan ordered censoring of the Internet and blocking of Twitter and Youtube in an attempt to stop more revelations of corrupt acts by him and his family. Recordings of Erdogan and his son talking about where to hide bribes that they had received spread nationwide through Twitter and Facebook.
Anti-government demonstrations in Thailand erupted again, after the Supreme Court nullified last month’s elections due to fraud by the party of the Prime Minister, who is now facing official corruption charges and impeachment.
Thirty-four people have died so far in continuing riots in Venezuela, where the nation seems split between Marxist government supporters and anti-corruption protestors, who are demonstrating against high crime, high inflation, and food shortages. President Maduro had three Air Force generals arrested for treason.
FEDERAL RESERVE AND YELLEN.
The biggest bear factor for gold this month was new Federal Reserve chair Janet Yellen , botching her first press conference on March 19th and telling reporters that the Fed would start raising interest rates next summer. This tanked the stock market and precious metals. Instead of trying to “walk back” her goof, other Fed officials went ahead and agreed with her, keeping the idea of higher interest rates in the news. Of course, the Fed thinks that interest rates are under 2%, even as food prices are skyrocketing. Pork is already 56% more expensive this year, and beef prices have increased 20% since January.
On the Retail Front
Gold and silver both broke above their 200-day moving average in March, due to situations in Ukraine and China and uncertainty over the U.S. economy. Gold hit a high of $1,392 an ounce for the month on March 17, where silver hit its monthly high on March 14, at $21.71.
Net gold imports by China through Hong Kong for February were reported at 109.2 metric tons. This is 30% more than January and 79% more than last February. Keep in mind that Hong Kong isn’t the way avenue available to China for gold. Expert on Chinese gold demand Koos Jansen calculates that total gold imports into China are already over 448 metric tons in the first three months of the year. Chinese businesses are starting to import large amounts of gold to use as collateral for bank loans, which accounts for some of that demand.
Another silver vault is opening in Singapore, this one with the capacity of 600 metric tons. It isn’t just gold that’s being bought hand over fist in Asia. Two new physically-backed platinum ETFs have been launched in South Africa, which is the world’s top producer of the metal, and South Korea has opened its first gold-backed ETF, as a measure to combat smuggling.
India has allowed five private banks to import gold, in an effort to ease gold shortages in the country. Until now, only six government-controlled banks and three importers had been allowed to import gold. All banks still have to pay 10% import tax and obey quotas. The draconian import restrictions and high taxes led to a nationwide strike by the gold industry on March 10, which may have played a part in the move.
Iraq bought 36 tonnes of gold in March, valued at over $1.5 billion dollars. The Iraqi central bank said that this huge purchase, the largest by any central bank in the world in the last three years, was to stabilize their currency– the dinar. This more than doubled Iraqi gold reserves. Now that Iraqi oil production has finally recovered, the government wants to divest some of the dollars from oil sales into something more solid.
Market Buzz
Three separate class-action lawsuits were filed this month against the five megabanks that make up the London Gold Fix association, claiming that they have manipulated gold prices since at least 2004. These suits come on the heels of increasing pressure by financial regulators investigating currency and precious metals manipulation at big banks worldwide. Several bankers involved in currency and gold trading have committed suicide or been fired in the last two months, in what the mainstream press consider coincidence or stress from overworking.
John Embry says that the increasing focus on the paper manipulation of gold will force an end to the practice in a matter of months, not years, and will let gold seek its true, physical price. (Scroll down at link for interview.)
Jim Rickards expounds in this interview on how the government’s declaration of the large megabanks as “too big to fail” and promising more bailouts has led to irresponsible, reckless behavior that will lead to the collapse of current monetary system. He foresees a new “global reserve currency” replacing the dollar, and financial power being based on gold.
Speaking of bad banks, the European Union has finalized new banking rules that mean depositors can lose their money on a “bail-in” of their bank if it fails. The U.S. Treasury Department is working on similar rules.
A citizens’ initiative called “Save Our Swiss Gold” has been blocked by the Swiss Parliament. The proponents of the measure, mandating the Swiss central bank hold 20% of its reserves in gold, had gathered enough signatures to qualify for a nationwide referendum on the subject, but a national vote on the subject was shot down by the lower house of parliament at the urging of the Swiss government and Finance Minister.
Jim Sinclair thinks Yellen will not only reverse the taper, but increase money printing to levels never seen before, weakening the dollar and boosting gold.
Looking Ahead
DOLLAR WEAKNESS.
We noticed that there was ZERO safe haven demand for the dollar during the Ukraine crisis. The yen, Swiss franc, and gold saw the safe haven action. Even the euro did better. This may be the first big sign of the dollar losing its status as the world’s global reserve currency.
China has been signing major bilateral agreements to conduct international trade in yuan, cutting out the dollar as the method of settling deals. China and the UK have announced that the first yuan clearing and settlement house in Europe will be set up in London. This will allow international trade between the EU and China to be conducted directly, reducing demand for the dollar and making it weaker. Of course, a weaker dollar means higher gold (and oil) prices, since they are denominated in dollars.
CHINA DEMAND.
We may be seeing even stronger physical gold demand out of China, as the public has been spooked over losses in investment trusts and co-ops. Some have simply closed their doors, with the manager disappearing with everyone’s money. This nervousness is starting to affect small banks in troubled areas of the nation, as two banks suffered a bank run on March 24. China does not have depositors’ insurance like the FDIC in the U.S., so if the bank makes too many bad loans, all your money is gone.
Royal Bank of Canada Capital Management has released a study that points to a strong gold rally ahead that could rival the one of 2005-2008. Noting that purchases by gold ETFs was a large factor in the rally of 2005-2008, and outflows from those same ETFs were a major reason for the bear market in 2013, the report notes that these ETFs no longer have the volume to negatively affect gold over the long term, and physical demand from China is many times larger than the ETF demand was, even at its peak.
LESS GOLD PRODUCTION.
Major mining companies are warning that global gold mining output could fall below expectations in 2014, due to development cutbacks and policy shifts spurred by the 28% drop in gold prices in 2013. The gold mining industry as a whole has taken at least $30 billion in write-downs, as in-ground stocks have had to be revalued downwards and new projects canceled. The CEOs of both McEwen Mining and Barrick see global production shrinking this year, while Goldcorp CEO Chuck Jeannes said he wouldn’t be surprised.
The practice of “high grading”– only mining the purest veins– helps gold production per ton of ore, but it leaves the lower grade veins behind instead of mixing it all together. This can drastically cut the life of the mine and result in that ore being left behind forever, as the tunnels made chasing only high grade ore makes it unsafe to extract.
PLATINUM SUPPLY. The platinum mineworkers strike in South Africa entered its third month in March. This is far longer than anyone had expected, and above-ground supplies are drying up. Conditions in some of the older, deeper mines have deteriorated so much that the companies say that they are no longer safe and will likely be permanently shut down. The strike has halted 40% of global platinum production.