This monthly column is by Steven Cochran of Gainesville Coins
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.
What Did Gold Do in April?
Spot gold began the month of April at $1,577 an ounce. Spot silver started the month at $13.93.
Gold put in a strong performance in April, considering that retail gold demand from Asia was non-existent. China, India, and the rest of the Southeast Asian nations remained under lockdown to combat the coronavirus. With nearly 2 billion people confined to their homes, discretionary spending of all kinds dried up.
Gold began the month on the wrong foot, as speculation crushed both gold futures and the spot price on March 31st. Both physical and “paper” gold fell $46 as a gold crisis erupted on the COMEX futures exchange.
That COVID-related physical gold shortage on the COMEX saw the prices of gold futures and physical gold diverge by the largest amount in history. The spread between futures and physical gold hit a mind-boggling $100 at one point in April. This spread is usually around five dollars an ounce.
Thanks to the various central banks signaling “QE to infinity,” gold finished out April with the largest price gain in 10 months, on a percentage basis. Gold futures ended the day 1.1% lower, but up 6.1% for the month.
Silver gained $2 in the first half of the month, but ran out of steam later on. Palladium lost its shine in April. Prices slumped as automakers and other heavy industry were locked down worldwide. Platinum traded in a 10% range between $714 and $794.
Factors Affecting Gold This Month
COMEX GOLD SHORTAGE
The grounding of the world’s airlines caused a crisis in an unexpected place in April: the COMEX gold market.
With the price of gold up $80 in March and still rising, hordes of traders stood for delivery in the first week in April instead of rolling their market bets over. The problem was, there weren’t enough gold bars in COMEX vaults to cover all the sudden demands on March 31st. Some of the demands were met by giving vouchers for gold in the LBMA vaults in London. But even with a valid claim, a person could not get their gold from London to New York.
Gold is usually shipped internationally in the cargo holds of passenger jets. With all the airlines grounded due to the coronavirus, this method was not available. Even if it was possible to move the gold, it had to be melted down from the 400 oz London “Good Delivery” bars to the COMEX 100 oz bars before it could trade in the US.
This brought up another major problem (that affected all gold demand, not just COMEX). Three of the world’s largest gold refineries are owned by PAMP, Valcambi, and Argor-Heraeus. Unfortunately, all three are located in southern Switzerland, near the Italian border. At that time, Northern Italy was the worst-hit spot on Earth in the COVID pandemic, and most of the workers at the refineries lived there. This resulted in a forced closure of all three refineries at the exact time they were needed the most. It was practically impossible to get your 400 oz bars recast into 100 oz bars, meaning that you could not resell them on the COMEX exchange in the US.
COMEX officials made an emergency move to create a new gold futures contract that could be settled by using 100 oz COMEX bars, 400 oz London LBMA bars, or 1 kg Shanghai Gold Exchange gold bars.
All three Swiss gold refineries reopened at half capacity later in April.
GOLD SUPPLY SQUEEZED FROM BOTH ENDS
It wasn’t just the futures market that was in crisis mode due to a gold shortage. Closed gold refineries meant that there were no small gold bars for sale, either. Even if the refineries hadn’t been closed due to the coronavirus, many gold mines were.
Mines in Canada, South Africa, Mexico, Peru, Argentina, and Australia were all shut down due to the virus. Gold bar and coin demand was so high, and supplies so hard to find, that Australia’s Perth Mint began sourcing raw gold from North America and West Africa. It couldn’t get the gold it needed from Australian mines, due to the closures.
RETAIL GOLD DEMAND ROCKETS HIGHER
The global COVID pandemic has combined with mind-boggling quantitative easing from every major central bank to make the future a pretty scary place to live, financially. This has caused demand for small gold bars and gold coins to jump to multi-year highs. Major gold distributors in Europe have remarked that no one is selling, at any price. For any one seller, there are 99 buyers. This has driven premiums for gold coins and bars to new highs. People lucky enough to already have gold see no reason to sell, since prices are headed higher. Those who didn’t buy gold when it was available are desperate to get some.
ASIAN COVID LOCKDOWNS KILL JEWELRY DEMAND
Gold demand in Asia evaporated in April, as nearly two billion people were confined to their homes (sometimes by force!). Jewelry demand usually makes up half of gold demand. This is especially true in Asia.
The global coronavirus pandemic brought the world’s economy screeching to a halt in the first quarter. This worldwide economic disruption was the main driver of demand in gold ETFs in March.
Europe replaced the US at the top spot for inflows, as Italy became the global epicenter for the COVID pandemic, and all of Europe came to a standstill. ETF activity in Asia was light, as the populations of China and other Southeast Asian nations remained under lockdown, with no one able to work or leave their homes.
Globally, more than $8 billion of new money (151 metric tons) flowed into gold-backed ETFs in March. Total holdings hit an all-time high of 3,185 metric tons of gold under management. Trading volumes also hit an all-time high. The regional breakdown went like this:
- North America: +57 metric tons
- Europe +84.3 metric tons
- Asia +4.8 metric tons
- Other +2.6 metric tons
Investors in the US and United Kingdom were far and away the largest buyers of gold ETF shares in March, buying $3 billion each country.
Central Bank Gold Purchases
This month’s World Gold Council report covers central bank gold purchases in February. Once again, Turkey was the major player, buying 24.8 metric tons of gold. Kazakhstan purchased 1.8 metric tons. Qatar showed up on the list in February, buying 1.6t. Russia pared back its gold purchases, only buying 10.9t in February.
The Russian central bank announced in April that it will no longer be buying gold from domestic gold miners. Russia has traditionally used central bank gold purchases as a subsidy for its gold mining sector. It has been lowering the price it pays for gold to encourage miners to export more gold. With the fall in oil prices, the Russian government is looking to increase other exports to make up the shortage in revenue.
On The Retail Front
The worldwide clamor for gold coins and gold investor bars collided with forced shutdowns of major gold refineries, gold mines, and coin mints in April.
Despite the COVID-caused closures at the West Point and San Francisco Mints disrupting the minting of bullion coins this month, the US Mint reported 105,000 ounces of American Gold Eagle, and 28,500 ounces of 24K Gold Buffalo bullion coins were sold in April (not counting April 30).
This compares favorably with the surge in sales we saw in March. March Gold Eagle sales totalled 151,500 ounces, with Gold Buffalo sales of 65,500 ounces
American Silver Eagles are still in short supply. The Mint has not updated sales for ASEs in two weeks.
At the Perth Mint, CEO Richard Hayes said that they are sold out of all gold bullion products “well into May.” Perth Mint is running constantly to make enough gold kilobars to fill demand on the COMEX exchange in New York. According to Hayes, they are shipped 7.5 metric tonnes of gold kilobars 11,000 miles to New York every week. The mint had to reopen an idled kilobar production line to meet demand.
On the retail side, things are just as hot. “For every coin we make, gold or silver, we could probably sell five or six more,” Hayes said. Perth Mint bullion sales for March totalled 93,755 ounces of gold, and 1,736,409 ounces of silver. This was the highest monthly retail gold sales for Perth Mint since April 2013.
Premiums for 1 oz gold coins have trended from $130 and up in April. The higher premiums are due in part because distributors have to offer more to entice people to sell.
The gold:silver ratio lost all sense of reality in March and April. The ratio, which shows how many ounces of silver equals one ounce of gold, has trended around 85 the last year or so, which was 20 points higher than the traditional 65 level.
In late March, the gold:silver ratio spiked from 99 to 125, before easing slightly and trending between 110 and 115 in April.
Unlimited money printing by all of the world’s major central banks has finally come true. The currency devaluation this will cause is a common theme in gold price predictions this month.
Credit Suisse notes, “It’s important to note that real yields have stopped rising.” They say to expect a rerun of gold’s behavior during 2008 to 2011. Gold saw a sharp drawback at first, as investors sold everything they could to meet margin calls on their stocks. It then went on to hit record highs in 2011. The Credit Suisse report says, “We still look for new record highs above $1921.”
George Gero at RNC Wealth Management says that $1,800 gold is in our near future. He notes, “Investors are doing what central banks do — buy gold to shore up currencies.”
The COVID pandemic and central bank craziness has a lot of Wall St banks and market analysts making big predictions for gold prices.
In a widely shared report titled “The Federal Reserve Can’t Print Gold,” Bank of America metals analysts are making a call for $3,000 gold in the next 18 months.
Ole Hansen at Saxo Bank is calling for gold to make a run at $1,800 by the end of the year, then push past the all-time high spot high of $1,917 next year. Further into the future, he says that $4,000 may be in the cards.
Analyst George Cox says that, with the shortage of physical gold, and the crazy price spread between COMEX gold futures and spot prices, look to the gold ETFs for direction. That direction is looking pretty bullish, as we saw in the ETF report above. Cox says that the #1 gold ETF, SPDR Gold Trust, shows $5.9 billion in inflows over the last month.
The Prime Minister of Thailand has implored people not to sell all their gold at once, as crowds swamp the nation’s jewelers. “I’m asking people to sell gradually, not in large amounts, as shops may face a cash crunch.” The nation’s tourism-based economy has been destroyed, dumping millions of people out of work. So with gold prices making new all-time highs this month, Thais are dumping their jewelry, gold coins, and bars.
Scotiabank shocked the precious metals world in late April, when it announced that it is closing down its metal trading arm. Formerly known as Scotia Mocatta, it was the world’s largest precious metal trader for many years. The original company, Mocatta Bullion, was founded in 1684. It was one of the original London gold fix companies. After purchasing the company in 1997, Scotiabank took over its role as one of the five “clearing” banks of the London Bullion Market Association.
The closure of numerous gold mines due to the global pandemic in April has removed an estimated 10 million ounces of new gold from the market this year. Even with higher prices coaxing more old gold out of hiding and into the recyclers, this shortage is going to have a big effect on gold prices in 2020.
Avery Goodman, writing at Seeking Alpha, believes that the European Central Bank quietly saved Deutsche Bank from defaulting on more than $1.3 billion dollars of gold futures contracts that it had shorted. According to Goodman, an amazing 15% of buyers of April gold futures stood for delivery of the physical metal, instead of rolling their position over into the June contract. The number of traders that usually stand for delivery is less than 1%, and are mostly industrial customers.
A common observation among the alternative press this month was that the Too Big To Fail banks got together to crush gold prices on the March 31 settlement date to save them untold billions of dollars while unwinding their short positions. Both gold futures and physical gold fell by $46 an ounce that day.
Pat Heller at Numismatic News looks behind the scenes of this recent crisis in short sellers trying to get physical gold to settle their contracts, and determines that the LBMA and COMEX technically defaulted on gold deliveries. Emergency actions by the COMEX included making a new type of gold future that can be settled by a mixture of 400 oz, 100 oz, and kilo gold bars. The historical settlements on the COMEX only accepted 100 oz bars. Another action by the COMEX this month to avoid defaults on gold deliveries was the invention of a certificate called Accumulated Certificate of Exchange, which was a fractional claim for 1/4 of a 400 oz Good Delivery gold bar.
Lawrie Williams at Sharps Pixley gives a dark warning about global social unrest that is likely to erupt from the economic damage that the COVID pandemic has inflicted on ordinary people. It sounds exactly like the TEOTWAWKI many of us have been preparing for:
“…if the back-to-work lobby gains ground, would represent a trade-off between an only-partial economic recovery thereby getting some of the recently-unemployed people back to work, and a resurgence of the pandemic outbreak and more deaths. Conflict could very easily rear up in some cities between heavily-armed, and sometimes hot-headed, right wing, mostly Trump-supporting, militias and the National Guard, and the loyalties of the latter cannot necessarily be taken for granted in all instances. The situation, to an outsider with family in one of the country’s largest cities, is somewhat frightening.”
In Europe, Tuomas Malinen, an economist in Helsinki, Finland, lays the seeds of Europe’s destruction at the feet of the ECB:
“The banks that can be bailed-out will be; the others will be bailed-in. In the latter, they will use the depositors’ money to bail the banks, which is legal now. People don’t really understand, but this is a grave risk to everyone holding large sums of money in banks. The risk of depositor bail-ins is really high.
The European banking sector will not be able to cope with this blow, and probably the eurozone won’t be either. We expect the eurozone to start breaking up at some point. Massive poverty and unemployment will create all sorts of havoc, especially in the center and southern European states. Possibly also in the US. So, our political leaders will violently try and push us into a federal union, or we break up.”
He goes on to tell people to hold physical cash and physical gold to help get through the crisis, saying, “Gold may become the only safe haven this time around, to be honest. Gold may rise a lot in this crisis, of which now we are in the early stages.”
Looking Ahead To May
The biggest influence on gold prices next month will be whether a coronavirus vaccine is found. Any time a pharma company makes an announcement, stocks and gold react violently (in opposite directions).
Other things that could affect gold prices in May:
- States allowing businesses to reopen, and getting the economy moving;
- Congress announcing more help for small businesses and people who lost their jobs;
- Continued shortages of COMEX-approved gold bars to meet demand as people actually stand for delivery
Internationally, as China and India relax epidemic lockdown restrictions, citizens will be selling tons of gold to take advantage of higher prices. Counteracting that, May is the most auspicious month this year for weddings in India, so experts are looking for a big uptick in the demand for gold jewelry.
We end this month with a bone-chilling look at living in the nightmare world of China’s new harsher Surveillance State after the COVID outbreak. Wuhan’s Return to Life: Temperature Checks and Constant Anxiety
This column is intended for educational purposes only. It is not intended as investment advice.