Welcome to SurvivalBlog’s Precious Metals Month in Review, where we take a look at “the month that was” in precious metals. Each month, we cover gold’s performance, and the factors that affected gold prices.
I’d like to start this month’s column by just saying “Wow.”
What Did Gold Do in March?
Spot gold ended February on a down note, falling $58 to end at $1,585 an ounce. This wiped out most of gold’s gains for the month.
The second week of March saw gold prices get crushed, as investors sold anything and everything possible to meet margin calls on their stock holdings. Some in the media proclaimed that the week’s heavy selloff of gold “proved” that it was no longer a safe haven.
Those who remembered the global stock crash of 2008 – 2009 knew that gold was doing exactly what it was supposed to be doing – acting as “disaster insurance” for investors’ equity holdings. Those people who had bought gold beforehand fared much better than the lemmings who went all-in on equities at the market top.
Gold recovered from the selloff rather swiftly, although it took silver and the other metals longer to catch up. The virus-induced freeze on factories and heavy industries was especially bad news for platinum and palladium. Meanwhile, silver slumped to an 11-year low of $11.94 per troy ounce before rebounding.
To put the level of volatile trading into perspective: gold futures saw their largest-ever loss in a single day – down almost $75 on March 13 – followed by the biggest single-day gains on record, adding $83 on March 23 and another $93 on March 24.
By month’s end, the yellow metal had cooled off somewhat but still hovered just below $1,600 an ounce.
What Is Different About This Crash?
Experts are saying don’t make the same mistake the talking heads on the news are making. Look to 1929 instead of 2008 to see how the current crash may play out. The 2008 crash was caused by big banks gambling with other people’s money. It’s right there in the name: “The Global Financial Crisis.”
This time the cause of the crash came from an outside source, an infectious virus that shut down all economic activity. The meltdown in markets has happened far faster in 2020 than it did in the last crisis. At one point all of the stock market’s gains since President Trump was inaugurated three years ago were vaporized in a matter of weeks.
One reason stocks have gotten slaughtered is that investors are afraid that the virus epidemic will cause supply shocks that central banks can’t fix with rate cuts and stimulus. This may (finally) be the moment where everyone realizes that bailouts by the Fed cause more bad than good.
Factors Affecting Gold This Month
MARKET CRASH TRIGGERS ASSET SELLING
Most asset prices were in free fall in early March. Large funds and over-leveraged investors were forced to liquidate anything that caught a bid — including Treasury bonds and commodities. “Liquidity concerns” became pervasive buzzwords on Wall Street. In some cases the fire sale was made worse by algorithmic trading and automatic portfolio rebalancing.
COVID-19 QUARANTINES DESTROY RETAIL DEMAND
Unemployment numbers in the United States came in far greater than expected. In one week, over 3 million Americans filed for jobless benefits. Hundreds of thousands of workers were unable to get their claims processed, as state unemployment agencies crack under the strain. With so many people being furloughed or laid off, and most “non-essential” businesses shuttered, commercial activity around the country ground to a halt.
CENTRAL BANK ACTION – QE TO INFINITY
The Fed unleashed a slew of alphabet-soup programs and “temporary” facilities to backstop financial markets. This stanched the bleeding in the stock market, but at the cost of a $5 trillion band-aid (and counting!). The scattershot of emergency measures dwarfs all previous quantitative easing (QE) efforts by central banks by a wide margin.
The initial reaction to the unprecedented money-printing was a weaker dollar. The USD nonetheless reaffirmed itself as the cleanest shirt in the stack of dirty laundry that is the world’s fiat currencies. Amid widespread volatility across sectors, King Dollar actually ended the month higher against its major currency peers, briefly touching a 3-year high along the way.
CRUSH IN OIL PRICES SPURS SAFE HAVEN DEMAND
Crude oil plummeted to its lowest price in 18 years. The lack of energy demand, especially from grounded flights and idled manufacturing plants, was the primary culprit. West Texas Intermediate (WTI) crude sank as low as $20 per barrel, shedding more than two-thirds of its value from early January. President Trump sought to broker a deal in the emerging oil price war between Russia and Saudi Arabia.
On The Retail Front
The US Mint saw a big jump in gold and silver demand in March, compared to an abysmal February. The Mint’s stock of Silver Eagles was exhausted by March 11. A press release by the Mint noted that sales for the first eleven days of March was triple the number sold in February. (Only 650,000 Silver Eagles were sold in February.)
Once production was able to resume, stocks of new Silver Eagles were sold on an allocated basis (i.e. rationed).
US MINT SALES FOR MARCH
Ounces of Gold Eagles:
February = 7,000
March = 142,000
Ounces of Gold Buffaloes:
February = 1,000
March = 47,500
Ounces of Silver Eagles:
February = 650,000
March = 4,832,500
Since the US Mint is required by law to only use gold mined in America for its gold coins, it did not see the shortages that other mints have encountered. This has not been the case in Canada, Australia and South Africa.
The US Mint was not the only government mint that was blindsided by the sudden demand for bullion caused by the global pandemic. All major mints ran out of gold coins in March. Bullion dealers could not replenish their stock, leading to long delays in filling customer orders.
The Perth Mint in Australia reported that they sold 22,921 ounces of gold and 605,634 ounces of silver in February. Their gold-backed ETF, known as PMGOLD, is popular in Asia. February inflows reflect the run on safe haven assets as the COVID-19 epidemic began taking over China.
The 12,700 oz worth of inflows into PMGOLD in February was a new record. Assets Under Management (AUM) rose to 150,480 ounces, with a value of $350 million Australian dollars. Both of these were also new records.
The global gold ETF scene, as reported by the World Gold Council, shows that a total of 84 and a half metric tons of gold were brought into the world’s gold ETFs in February. This brought world holdings to an all-time high of 3,033 metric tons. Gold ETFs in all major regions of the world saw inflows in February.
Remember how we talked about new all-time highs in gold prices in several currencies last month? Credit Suisse is one of many big banks and fund managers calling for new all-time highs in gold, due to the coronavirus pandemic:
“Resistances above $1700/05 are eventually seen at $1734, the 78.6% retracement of the 2011/15 downmove, then the $1796/1803 corrective highs from 2011/12. Big picture, we still look for new record highs above $1921.”
One options trader went BIG on gold to start the month, dropping a cool $2 million that gold futures would rise above $1,742.20 by May 26, when the options expire.
The gold:silver ratio broke above 115:1 three separate times in March. It hit an all-time intraday high on March 16 of 123:1! Market watchers thought it was the End Times when it broke above 100:1 earlier in the month.
The two factors that contribute to a wide gold:silver spread are usually safe haven demand for gold at the same time an economic slowdown is depressing demand for industrial metals. We have certainly seen this in spades in March, with physical gold shortages at the same time that as good portion of the planet is in quarantine due to the COVID-19 pandemic.
Looking Ahead To Next Month
The coronavirus pandemic doesn’t look like it will be ending anytime soon. Factors that will specifically affect gold prices going forward will be:
1. The continued physical gold supply shock as mines and refiners remain closed;
2. The lack of available commercial flights to move gold internationally;
3. Whether or not the recent stock rally is a “bear trap” (aka sucker’s bet) or not.
Major bullion distributors are expecting increased demand when people begin receiving their $1,200 in “helicopter money,” especially in the silver market. This might not pan out, as more and more people burn through their savings after being laid off.
This column is presented for educational purposes only. It does not constitute investment advice.
– Steven Cochran of Gainesville Coins