Welcome to SurvivalBlog’s Precious Metals Month in Review, by Steven Cochran of Gainseville Coins [1] where we take a look at “the month that was” in precious metals. Each month, we cover the price action of gold and examine the “what” and “why” behind those numbers.
What Did Gold Do in October?
October gave gold no treats. Gold started the month in the $1,335 range and ended more than $50 lower. Unexpectedly hawkish comments throughout the month from various senior officials at the Federal Reserve sent the dollar on a strong rally while depressing gold prices. The capitulation of the British pound to 30-year lows helped the dollar hit eight-month highs.
Cascading sell stops were triggered by automated high frequency trading (HFT) computers early on October 4, sending gold prices crashing. By the close of trading, spot gold had lost $42.80 an ounce. Gold did not even see $1,275 on a closing basis for the rest of October, though it edged up to near that level in the last week of the month.
Factors Affecting Gold This Month
Dollar Dominance
The U.S. dollar began showing some strength against the Japanese yen in October, while keeping a boot on the neck of the British pound. The pound was hit by what may have been the most severe flash crash of the year, in overnight trading in Asia. In the space of two minutes [2], high frequency trading programs blew out major support levels to crash the price of the pound by 8% to new 31-year lows. While the price soon recovered from $1.15 to $1.24, it never really recovered from that level for the rest of the month.
Tough Talk From Fed
Fed rate hike fears hit safe haven assets right off the bat in October. On October 3rd, Cleveland Fed president Loretta Mester said that there was a “compelling” case [3] for an interest rate hike in November, six days before the Presidential election. Since Mester has traditionally been seen as a monetary policy “dove,” markets freaked out. Mester’s comrades at the Fed did their part in putting the fear of rate hikes in the market as well. Combined with economic reports of more good than bad, they had the effect of moving the odds of a December rate hike [4] to nearly 80%.
Other Central Banks
Rumors hit the market on October 5 that the European Central Bank [5] was considering ending its bond buying/money printing/QE program early. Bonds were crushed on both sides of the Atlantic. ECB officials quickly denied any such plans were in the making. At the central bank’s October 20 policy meeting, it kept interest rates at -0.4% [6] and reaffirmed that it would keep buying €80 billion in bonds per month. While EU inflation showed a tiny increase, it was nothing compared to the ECB’s target of 2%. Five days later, ECB president Mario Draghi [7] admitted what markets have been saying all along: Banks can’t increase lending if they are losing money due to negative interest rates. Despite that, he said that negative interest rates would continue for now.
His speech reinforced expectations that the ECB will not cut interest rates deeper into negative territory anytime soon.
The British economy has yet to see any real negative effects from Brexit. Third quarter GDP was unexpectedly strong, rising 2.3% on a year over year basis. There is now some discussion on who has the stronger economy: the UK or the U.S.? This bright outlook has some economists not expecting an interest rate cut or QE from the Bank of England until the end of next year. In fact, a stubbornly weak pound and the prospect of rising oil prices has whispers of stagflation starting in the shadows.
On the Retail Front
After a poor showing this summer, sales of the American Silver Eagle [8] and Gold Eagle [9] bullion coins picked up this month. The drop in gold and silver prices led to a good bit of buying in the dip.
The Royal Canadian Mint has released second quarter figures that show that numismatic coin sales were a drag on profits, but revenue from bullion sales jumped by 40% for the quarter. Gold bullion coins sales (mostly Gold Maple Leafs) were up 53% to 251,400 troy ounces. Silver bullion coin sales (mostly Silver Maple Leafs) for the quarter grew by 24% to 8.4 million troy ounces. (All figures are year over year from 2015.)
Growing demand for China’s Gold Panda and Silver Panda bullion coins has led to increased mintage limits for several of them.
Market Buzz
Zimbabwe Tries To Reenter The Currency Business
Think we have a problem with out of control money printing by the Fed? Yellen is bush league compared to Zimbabwe, where the Mugabe regime printed so many trillions of dollars from the 1990s to mid-2000s that it caused inflation to grow by 98% a day. Everyone lost everything when the economy collapsed and the value of the local currency hit zero in 2009, so news that the government would start printing new Zimbabwe dollars [10] backed by a $200 million bond sent most of the country into a panic. Mugabe intends for these “bond notes” to trade at par to the U.S. dollar. Lotsa luck with that, since no one trusts the government to not “print to infinity” again.
Gold Manipulation Lawsuits Go Forward
In the wake of a court ruling from a U.S. District Court judge in New York, the Bank of Nova Scotia (BNS) must now turn over internal correspondence [11], including electronic communications, between its employees in regard to manipulation of the old gold fix. The process of discovery by the plaintiffs’ lawyers will doubtlessly uncover more “smoking guns” pointing to other Too Big To Fail banks.
On a related note, TF Metals Report ponders the shenanigans [12] going on on the COMEX “paper” gold market
Curbside Gold Service
Distrust of the banking system, as well as no access to banks at all by the rural population, means that individuals in India probably possess more gold than any other nation. To tap into that market, the Muthoot Group has launched a mobile gold purchasing service. All it takes is a phone call, and a van loaded with the latest in scientific gold testing methods will come to your house, weigh and authenticate your gold bullion and jewelry, and cut you a check right on the spot [13]. This new venture complements Muthioot’s growing number of gold buying storefronts across India.
Warnings on the U.S. Economy
Peter Schiff says, “A real recession is better than a fake recovery.” He says we should take our medicine [14], get the Fed to raise interest rates, and get through the recession that zero interest rate policy is hiding. He says it’s better to get it over with now than let the Fed keep it bottled up to cause far more damage later.
Marc Faber agrees: “It’s not politically correct to say it, but for the social system of the Western world and for capitalism a serious recession would be desirable [15], because the financial sector as a percentage of the economy is still too big.”
Raoul Pal, the ex-Goldman Sachs analyst who predicted the 2008 financial crisis, says a recession is coming and gold is greatly underpriced considering the macro economic situation. While the U.S. dollar has seen major safe haven demand following Brexit, which has been increased by fears over the results from negative interest rates. He told MarketWatch, “I’m not a gold bug, but this is the currency I would choose now [16].”
Recession? Hedge fund manager Kyle Bass says the future is even worse [17]– stagflation. He sees higher inflation and weak productivity next year, while China’s huge debt tsunami will break and pull the entire global economy down.
Even “mainstream” economists are getting spooked this October [18]. Loan deliquencies? Near-zero investment in America’s production capacity? Surging healthcare costs? A complacent Federal Reserve? How about ridiculous levels of leverage/debt in the Chinese economy? If you worry about how these will affect you, you have good company.
Gold analysts at UBS say to prepare for a big move in gold in the next 6 to 12 months [19], as the Fed remains too afraid to make more than a token move to increase interest rates, while the global economic picture deteriorates.
Physical Gold Sector
Swiss gold exports [20]in September fell 9% compared to August but were up 5% on a year-over-year basis. As usual, most of the gold was headed to the UK and from there to Asia via the London Bullion Market. The year-to-date export total of 1,349 metric tons is 4% higher from a year ago. Swiss gold going to China was up 64% last month, compared to September 2015, and the good monsoon season in India [21] has pumped up demand ahead of the important fall festival and marriage season. After years of drought, farmers finally have the cash to scratch that gold itch. As a result, Indian gold imports from Switzerland are 26% higher than August.
Barrick considers their Veladero gold mine in Argentina one of its core assets. That hasn’t stopped two different Chinese mining companies [22] from trying to buy a 50% stake in the mine. Barrick isn’t the only company in Oriental crosshairs. For the first time in history, China has bought more foreign companies than the U.S. [23]
Speaking of gold mining companies McEwen Mining is debt-free and loving it. They recently announced third quarter production results, which included this statement: “As at October 7, 2016 we have no debt and liquid assets of $61 million composed of $39 million of cash, $18 million of precious metals, and $4 million of marketable securities.” This puts the company in a very good spot to take advantage of opportunities in an upturn in the gold market.
Koos Jansen at BullionStar notes that the World Gold Council, Thomson Reuters GFMS, and other big consultancy groups are still underestimating physical gold demand [24].
That gold demand, especially in China, is set to jump. Goldman Sachs says to watch for greater gold demand as Chinese investors flock to gold to preserve their purchasing power [25] against depreciation in the yuan.
Looking Ahead
The Presidential election finally ends next month, praise God on High. Both candidates have blown off calls to restrain government spending, and political turmoil will spike no matter what. As far is gold is concerned, prices are going to rise [26] no matter who moves into the White House next January.
No one really believes the Fed is serious about considering a rate hike six days before the election, so the FedHeads will be out in force in November, trying to influence markets before the December FOMC meeting.
Remember how the Swiss dug all those military tunnels into the Alps back during the Cold War? Well, to end this month, we take a look at how those tunnels are being converted into secret gold vaults [27] for the ultra-wealthy.