Welcome to SurvivalBlog’s Precious Metals Month in Review, by Steven Cochran of Gainsesville Coins. Every month we take a look at “the month that was” in precious metals, covering the price action of gold and examine the “what” and “why” behind those numbers.
So much for the “summer doldrums.” July was a wild roller coaster ride, no matter which market you looked at, and gold was no exception. If it wasn’t stress over whether the Fed would raise interest rates next month, it was the meltdown in the Chinese stock market, or the fate of Greece and its economy.
Remember that “not for profit” sell-off in gold futures (a.k.a. “manipulation”) two years ago, in July 2013? Someone thought it was time to do it again this month. The first attack was on July 7, as millions of investors in the Chinese stock market were hit with margin calls to cover stocks they’d borrowed money to buy. The resulting explosion of physical gold and silver demand caught the bullion market by surprise, and the U.S. Mint ran out of Silver Eagles that same day.
There were two more attacks in July, on the 17th and the 20th, and premiums climbed as retailers scrambled to find merchandise. Gold ended the month on a high note, as the worst labor costs report on record sent the dollar tumbling amid fears that the Fed would delay the upcoming rate hike.
Precious Metals Market Drivers in July
Climax In Greek Drama
For the second year in a row, a crisis in Eastern Europe disrupted the normally quiet summer cycle for gold (and stocks and bonds). Last year, it was Ukraine, and this year it was Greece. The leftist government in Greece started the month by defaulting on a payment on an IMF loan, becoming the first European nation to do so. The ruling Syriza party (whose name means “Coalition of the Radical Left”) later admitted that this was a ploy to try and force the hand of its creditors.
When this didn’t work, prime minister Tsipras called a sudden national referendum to let the people decide whether to accept demands of more austerity from the EU nation who were paying for the bailout. The result was a resounding NO and put Greece’s future in the Eurozone in doubt. As talks broke down, the European Central Bank stopped pumping emergency funds into Greek banks, forcing the government in Athens to close all banks and implement capital controls.
We have warned many times that you need to hold physical gold outside the banking system, and Greece shows why. Banks were closed from June 28 to July 20, three weeks. During this time, no one could get to their safety deposit boxes.
Incendiary Greek Finance Minister Yanis Varoufakis was forced to resign after the austerity referendum, as his antagonistic relationship with the rest of the EU finance ministers had become too high a hurdle for Tsipras to ignore. The six months of brinksmanship and bluster was all for naught, as Greece was forced to accept austerity measures even harsher than those rejected by the national referendum on the 5th. The Greek parliament voted to pass the first round of austerity laws demanded by its creditors on July 15, against a background of street riots and protests. This show of commitment to reforms opened the way for talks about a third bailout to begin, and the ECB resumed emergency injections of cash into the Greek banking system, which was close to collapse.
Chinese Stock Market Crash
The fall of the Chinese stock market, which began in mid-June, accelerated in July. By July 8th, the Shanghai Composite index had lost 30%, and over 1300 companies had requested that their shares not be traded. The total market loss at the time was over $3.2 trillion, and it only got worse as the month went on. The Chinese government ordered state-owned companies not to sell stock, and forbid the issuance of IPOs. Western analysts began telling investors to forget about Greece – China was the real danger to the global economy.
Finally, in a move that would have been impossible in the West, the Chinese government started directing state-owned enterprises to buy stock, and began lending money to stock brokers to buy stock, in a direct intervention in the market. This spending of $800 billion of government money did little to halt the slide at first, but sent the signal that the rulers in Beijing would not let the market collapse. Things stabilized for a while, but then on July 27th, the Shanghai market fell by 8.5%.
After the worst was over, the hunt for a scapegoat began. (There always has to be a scapegoat, to direct blame away from the ones in power.) This resulted in Chinese authorities going after (mostly foreign) HFT spoofers and manipulators. High Frequency Trading and spoofing (placing fake orders to make the market move to where you can make a profit) is rampant in the U.S. stock market, but the large Too Big To Fail banks and hedge funds have bought enough political influence that they have not been stopped. Could Shanghai become safer for humans than the NYSE?
When asked what caused such a huge run-up and crash in the stock market, Chinese experts pointed to two reasons: greed and lack of knowledge among Chinese individual investors. Unlike Western markets, which are dominated by big institutions, such as hedge funds and mutual funds, 80%-85% of the Chinese stock market is made up of individuals—200 million of them. The scary part is that two-thirds of them don’t even have a high school education, and they want to believe that the Communist government will protect them from losses. Beijing doesn’t help matters when the official press exhorts people to buy into the stock market, which leads people to borrow heavily to buy stocks, confident that it is a “sure thing” because the government encourages it.
But, as big as 200 million people sounds to Americans, this is a tiny fraction of the nearly 1.4 billion people in China. The big danger to the global economy isn’t the Chinese stock market, it’s the Chinese economy.
Takedown Déjà Vu
By July 7, the Chinese stock market had fallen over 25%, and margin calls were forcing investors to liquidate whatever they could. Copper has been a popular collateral item in China, and the sudden liquidation of copper on July 7 drove prices to six-year lows. The sell-off also caught gold and silver in the downdraft. Gold dropped 1.5% to lows not seen since March.
After this, the Wall St. sharks smelled blood in the water, and they waited for the moment to strike. The excuse for the take-down came on July 17, when China updated its official gold reserves for the first time since 2009. The 1,658 metric tonnes reported was a 57% jump from 2009 levels but only a fraction of what analysts have estimated China’s gold reserves really are. *Someone* used that disappointment to crash the gold market, by dumping $1.4 billion in gold futures (AKA “paper gold”) onto the market. This smashed the gold price to a five-year low and caused a stampede for the coin shops and gold dealers as physical buyers took advantage of the price drop.
The manipulators weren’t quite done, though, and picked the most illiquid time possible to crash the gold price for their big finish. In a move calculated to drive gold prices down as much as possible, the manipulators waited until the Japanese markets were closed for a holiday, and the New York and London markets hadn’t opened yet. Right as the Chinese market opened, 57 metric tonnes of gold futures were sold into the market at once. Gold prices fell as much as $25 an ounce, and even the mainstream media could not ignore such blatant manipulation. The financial press was soon filled with speculation as to the identity of the perpetrators, with no one willing to take the blame.
No matter how the Communist Party intervenes in the Chinese economy, it can’t deny the realities of the gradual slowdown of its real economy. Another round of stimulus measures helped Q2 growth appear better than it actually was. Weakness in manufacturing was even more telling, as the country’s factory production sank to a 15-month low.
Fed Rate Hike Drama (FOMC)
An ongoing trend in July was the daily rumors about the timing of the Fed’s initial move to raise the federal funds rate, the country’s benchmark interest rate. It will be the first rate hike in nearly a decade, and the markets have obsessively watched for any signs from the central bank about when the rate increase will occur.
Virtually every time that some rumor breaks about the Fed’s plan for raising rates, the dollar spikes. This has had serious implications for commodities, which are essentially experiencing deflation due to the stronger currency. Despite the attention paid to gold, oil has been hit far harder by the downturn in the commodities cycle: crude oil prices matched yearly lows just above $40 per barrel in July after a modest recovery during the spring months. This has coincided with outright oil wars between OPEC members (especially Saudi Arabia) and shale oil producers in the U.S. As OPEC refused to stop pumping oil, hoping to squeeze out unprofitable shale operations by driving crude prices ever-lower, the oil cartels hold on global prices seemed to be broken, as many American oil producers remained profitable even at such low resource prices.
The entire summer has been like a horror movie for those heavily invested in commodities, as prices have plunged largely across the board, tracking with falling energy costs. Russia, whose economy is almost wholly dependent upon commodity exports, has certainly felt the pain. The country’s central bank yet again purchased gold to shore up its position, adding 25 metric tonnes of gold to its reserves.
The soap opera surrounding when the Fed will raise rates was also a story unto itself. Two of the Federal Open Market Committee (FOMC) voting members exchanged entirely contradictory views on the rate hike outlook on successive days during July: Federal Reserve governor Jerome Powell hurried to get in front of a camera and state that the FOMC’s view remains uncertain only a day after Atlanta Fed President Dennis Lockhart blew the whistle on the high likelihood of a September rate hike. Powell was doing damage control on Lockhart’s slip, as the Fed always avoids making definitive statements one way or the other in order to keep markets perpetually guessing.
On The Retail Front
With the drop in precious metal prices amid the broader rout in commodities during July, sales of bullion coins and bars were robust over the month. The U.S. Mint actually ran out of its allocation of American Silver Eagles, leading to a two-week delay where no distributors were receiving the silver coins from the mint. Premiums on the flagship U.S. silver bullion coin skyrocketed as ASEs became increasingly difficult to find on the market. Similarly, the Royal Canadian Mint had to ration the availability of its Silver Maple Leafs.
Amid the price dip frenzy, gold bullion sales in the U.S. were their highest in 2 years. Total bullion sales through the U.S. Mint notched a 17-month high in July. The mint waited until the last day of the month to introduce its new High Relief Liberty gold coin for sale. Within hours of initially being offered, the .9999 fine gold coin sold out of its maximum mintage of 50,000 coins.
Market Buzz
With the precious metals falling for much of July, the preeminent market analysts had their hands full with the establishment media, which jumps on any opportunity to bash gold and precious metals. The MSM was busy with headlines about the end of gold as an asset, how it had “lost its luster” or gone the way of past trends. To call gold’s value a mere trend is laughable, and reveals the insane bias of the media regarding honest money.
Peter Schiff rightly pointed out that today’s fiat currencies depend entirely on a system of faith, while hard money like gold does not. It’s again laughable that Schiff even has to argue this point, as supposedly respectable pundits compared gold to bell-bottom jeans and pet rocks. Last time I checked, those items only held the intrinsic value of their denim or mineral composition, and fell by the wayside as trends because of changing tastes. Though fashions and tastes are always changing, the understanding that tangible precious metals hold real value is not.
Elsewhere, Casey Research astutely shows that the conventional “wisdom” about how gold prices will react to the imminent rate hike from the Fed is completely misguided. The prevailing thought among analysts is that an interest rate increase will drive the dollar higher, thus pushing gold prices lower in real terms. Yet, the research shows that each of the last four times a rate increase cycle began, gold actually gained. This trend was apparent in 2004, the last time that the Federal Reserve began a round of rate increases, as spot gold tracked higher with each rate hike.
While speaking on why the Greek debt crisis would drag on rather than choosing the most reasonable solution (i.e. an exit from the euro area), Eric Sprott reiterated his conviction that gold and silver are still viable investments, and cannot be invalidated simply by fickle market trends.
Looking Ahead
Apparently the fight is not over between the U.S. government, which claims that 10 privately-owned 1933 gold double eagle coins were stolen, and the Langbord family, who found the rare coins in a safe deposit box belonging to the late family patriarch. Although a judge awarded the coins to the Langbords, that decision has been overturned, and the case is dragging on.
U.S. gold coins like double eagles ($20 gold pieces) were confiscated by executive order in 1933 and were deemed illegal to own until the country officially ditched the gold standard during the 1970s. While nearly all 1933 gold coins, including double eagles, were melted down at the time, a few scarce examples escaped. The only 1933 double eagle to ever have its monetary status (and therefore legality) reinstated was a single example once owned by Egypt’s King Farouk, which sold for more than $7 million at auction nearly 15 years ago.