Welcome to SurvivalBlog’s Precious Metals Month in Review, by Steven Cochran of Gainesville 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.
Volatilitywas the name of the game in August, as a surprise currency devaluation by China spooked investors into realizing that the Communist government in Beijing likely was lying about the state of their economy. This ignited a global meltdown in stocks, the likes of which have not been seen since the height of the financial crisis.
Gold started the month struggling near multi-month lows, under $1,100 an ounce but rose on safe haven bids as the month wore on briefly reaching the $1,170 mark at the height of the stock market meltdown. Gold got another boost at the end of the month, after falling on a stock rally, as equities were unable to hang on to gains.
Precious Metals Market Drivers in August
CHINA SYNDROME
The Chinese government shocked world markets on the 11th, when it suddenly devalued the renminbi (yuan) by 2% and pledged to let it move according to market forces. Stocks worldwide sold off, and the currencies of nations that supply China with raw goods were hit hard. Gold jumped $15 on the news. Beijing didn’t keep its promise of a “free market” in currencies for long, as it began massive direct intervention by selling U.S. dollars and buying yuan to stop the collapse of its currency.
The devaluation of the yuan has more people receptive to the idea that the Chinese economy is in far worse shape than the government will admit. The only reason the Shanghai stock market hadn’t completely come apart is that the government is forcing state-owned entities to buy stocks. August 24 was called “Black Monday” by the press, as the Shanghai composite lost 8.5% and dragged the rest of the world’s stock markets down with it. By Wednesday, massive direct intervention by the Chinese government when stocks fell too much had the index solidly in positive territory, and investors returned to stocks in the belief that the government would not let the market collapse.
GLOBAL STOCK ROUT
Stocks in the U.S. and Europe saw the worst days since the height of the financial crisis in the wake of China’s yuan devaluation and accelerating stock market meltdown. American households saw $1.8 trillion of wealth go up in smoke in the stock market. Many “mom and pop” investors saw the writing on the wall and followed the big equity firms out of the market just in time. Bloomberg notes that individual investors pulled out of both stock and bond mutual funds in July, escaping the crash in August. $6.5 billion was taken out of stock mutual funds, and $8.4 billion was taken out of bond mutual funds. This is the first time since 2008 that small investors have fled the market completely. Usually, when they cash out of stock mutual funds, they move to bonds.
FED POLICY
Perhaps even more than the big trouble in China, the uncertainty over Fed interest rate policy shaped the economic landscape in August. The Fed seems to have adopted a policy outside of their dual mandate of controlled inflation and full employment and now consider making sure wealthy investors don’t lose money in the stock market as their goal. Whenever the market gets jittery over a rate hike, one of the Fed officials comes out and says something to rescue stocks.
Some pundits, notably James Rickards and Peter Schiff, are betting that not only will there be no rate increase with inflation near zero and stocks selling off, but that the Fed will actually go back to quantitative easing – “printing money”. Albert Edwards, an analyst at Societe Generale, agrees, saying “you’ll hear the printing presses from Mars.”
After the big losses on Wall St in the last part of the month, some in the “alternative financial press” said to watch for the Fed to float a trial balloon regarding QE4. Lo and behold, the next day, Minneapolis Fed President Narayana Kocherlakota said he was in favor of another round of quantitative easing instead of raising interest rates (cue spooky music).
Speaking of quantitative easing and the trillions of tax dollars the Fed gave to Wall St. banks, research by the St. Louis Federal Reserve shows no evidence that QE helped the economy.
On The Retail Front
The Greek crisis, which resulted in austerity measures being passed by Athens and the government losing its majority, has led to snap elections being called for September 20th.
It also led to a huge increase in physical gold purchases in Europe. Gold refiner Degussa reported that German gold buying increased by 50% in the first half of the year.
American Silver Eagle sales for August topped four million ounces, following an extremely strong July. ASE sales for the year are already over 31 million coins.
Market Buzz
China surprised global markets (in a good way, this time) by updating their official gold reserves for the second month in a row. Prior to last month, the latest government numbers were from 2009. China’s official gold reserves grew by 19 metric tonnes in July, to 1,677 metric tonnes. This makes China #5 in the world for gold reserves and the largest non-Western gold reserves in the world. Only the United States, Germany, the International Monetary Fund, and Italy have larger gold reserves.
It isn’t just the Chinese (and Russians) that are bullish on gold. Billionaire hedge fund legend Stan Druckenmiller has placed a huge bet on gold prices rising. Bank of America is joining the mainstream voices declaring that gold is undervalued at $1,100.
Peter Schiff says blame the Fed, not the Chinese, for spooking the stock markets.
Also from Peter Schiff, he says the Chinese are too late to the currency wars with their yuan devaluation, because the Fed will launch QE4 to win the “race to the bottom”.
While not jumping on the “QE4” bandwagon, both Barclays and TD Securities say forget about a rate hike in September; it isn’t happening until March of next year!
Mega-miner GoldCorp (NYSE: GG) just started production at a new $2 billion gold mine in Canada.
In the “Who’d have thought it?” department, the Federal government is returning “most” NORFED dollars it seized in its prosecution of Bernard von NotHaus. For good measure, we get news that *maybe* someone is taking a real look at gold manipulation.
We end this month with a story that once again proves that “all that glitters is not gold”. Hundreds of people in a Chinese city shut traffic down all day, frantically harvesting “gold dust” from a busy street. It turns out that the treasure was really crystalline sulphur!