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 October?
Gold was range-bound between $1,890 and $1,930 in October, until it suffered big COVID-related losses the last three days of the month. Spot gold fell from an October 27 close of $1,907 to an $1,867 close on the 29th. Even this $40 drop did not move the average spot gold price in October more than a dollar, from $1,902 to $1,901 an ounce.
Silver moved in a two-dollar range between $23 and $25 (as of October 29), averaging $24.19 an ounce.
Stimulus talks between Nancy Pelosi and the White House were the lever that moved all markets this month. When markets thought a stimulus deal was near, stocks and gold rose, and the dollar weakened. When talks broke down, markets moved in the opposite direction.
Stocks and gold mostly ignored rising COVID infections until the end of the month. Sharply spiking cases and hospitals rapidly running out of ICU rooms hit both US and European markets at the same time. The massive selloff on Wall St saw gold prices plummet, as traders sold bullion to cover margin calls on short positions.
The first estimate of third quarter GDP came in at 33.1%, compared to the -31.7% drop in the second quarter. This news reversed early losses in the stock market, and sent the dollar sharply higher. The combination pushed gold solidly into negative territory for the month.
Factors Affecting Gold This Month
The on-again, off-again stimulus talks between Nancy Pelosi and the White House were the major factor moving all markets until the explosion of COVID cases in the last week of the month. Corporate America would of course love more bailouts, so a second stimulus bill would be good for stocks.
A new stimulus deal would require more deficit spending. This would require the government to sell more Treasury bonds, which would push yields higher, and deepen negative real interest rates. This would improve the attractiveness of gold. More deficit spending would also weaken the dollar, which helps gold prices internationally.
The failure to pass a stimulus bill pushes stock prices lower as companies lose money and lay off workers. The government wouldn’t have to sell more Treasuries, which would promote a stronger dollar.
This dynamic has had gold moving the same direction as the stock market.
Political games eventually killed any hope for a stimulus bill before the election. Since the stock market was doing so well, neither side saw a stimulus bill as necessary, especially if it made the other party look good ahead of the election.
The dollar was moved mostly by the stimulus games in Washington this month. The only other thing affecting the greenback for most of the month was brinkmanship in Brexit negotiations between the UK and the EU.
Similarly to other markets, everything changed when the third wave of COVID infections filled hospitals and set records for daily cases in the US and Europe. This sent the dollar much higher on safe haven demand from investors. The DXY dollar index hit a 4-week high on the 29th. This in turn pushed gold prices lower.
The main influence the presidential campaign had on gold prior to the election was market fears of a contested election. The uncertainty over who the President would be had investors nervous. Now, with the appointment of a third Trump-chosen Supreme Court Justice, anything like the “hanging chad” case that happened in 2000 would automatically go to Trump.
This realization has calmed markets, making the election results less influential on stock and gold prices.
The main impact the COVID pandemic had on US markets for most of the month was vaccine news. In addition to the direct effects on stocks, expectations of a successful vaccine also reduced the urgency for Pelosi and the White House to agree to a stimulus deal.
This changed when Europe was suddenly hit with record numbers of daily infections and hospitalizations, made worse by the start of the winter flu season. Governments scrambled to contain the new wave of infections, but attempts at reimposing lockdowns and other restrictions met public resistance.
Riots broke out in several cities in Italy, as protests turned violent in clashes with police. Major European cities went into lockdown or implemented curfews. When France went into total nationwide lockdown and Germany announced a ban on public gatherings and shutdowns of bars and theaters, European markets finally fell.
Cases and hospitalizations in the US have also reached crisis levels, but were mostly ignored by Wall St until Congress adjourned without passing a stimulus bill. As stocks saw their worst day since June, gold positions were liquidated to cover margin calls.
Market unease increased the last week of October, as pharmaceutical CEOs warned that no vaccine will be 100% effective, or provide permanent immunity. The head of the UK’s vaccine task force told reporters that a fully-effective vaccine may never be found.
This is highlighted by news that a new strain of coronavirus is rapidly spreading through Europe. Known as the 20A.EU1 variant, it is unknown how effective current vaccines will be against it.
Fed and Other Central Banks
Every time a Fed official spoke publicly in October, they called on Congress to pass another stimulus bill. They each noted that the Fed could not do more than it already was to rescue the economy, and that it wasn’t enough. Congress was too busy with political games to care.
The Bank of England discussed implementing negative interest rates in order to stimulate the British economy in October. In addition to the economic disruptions caused by the COVID epidemic, the BoE has to prepare contingency plans in case the UK crashes out of the EU in a “no deal Brexit” situation.
CENTRAL BANK DIGITAL CURRENCIES
The BIS, Fed, ECB, Bank of England, Bank of Canada, Bank of Japan, Swiss National Bank, and Swedish National Bank (whew) have jointly issued a report laying out the framework for implementing an international central bank digital currency (CBDC) system.
The Swedish central bank is already working on its own “e-krona” digital currency, which is not yet ready for implementation. The People’s Bank of China is even further ahead of the game, running a pilot program in a joint effort with private Chinese companies.
All the talk is about how it will streamline the financial system and allow central banks to send stimulus directly to citizens, etc. What the central banks DON’T want to talk about is that every transaction using official cryptocurrencies will be tracked on the blockchain, allowing the government to see what you’re buying, when, and where. No thanks. Debit cards already give banks too much information about us.
Central Bank Gold Purchases
This month’s Central Bank Gold Purchases report by the World Gold Council is from IMF data covering August sales and purchases.
Central banks were net sellers of gold for the first time in nearly a year and a half in August. This was due to one country — Uzbekistan. The Central Asian nation took advantage of world record gold prices to dump an eye-watering 31.7 metric tons of gold onto the market. Even after this, it still holds almost 300 tons of gold reserves.
This huge sale overwhelmed purchases by everyone else, dragging the global total to outflows of 12.3 metric tons. Most of the gold buyers in August were clustered together. Kazakhstan (1.3mt), Kyrgyzstan (5mt), Turkey (3.9mt), and Ukraine (2.4mt) were all buyers. Other buyers were Mongolia (1.3mt), India (4mt), and Qatar (1.6mt)
One theory on the slowdown in central bank gold purchases is that the value of the gold they already own has increased so much, they haven’t had reason to buy more.
In related news, the IMF is resisting calls to sell its gold to fund economic relief to third world nations devastated by the COVID pandemic. The IMF says that its gold provides “fundamental strength” to its balance sheet, allowing it to offer loans to distressed countries at lower rates.
The October 8th gold ETF report from the World Gold Council shows that worldwide gold ETFs had 68.1 metric tons of net inflows in September, valued at $4.6 billion. This is the tenth consecutive month of inflows for the world’s gold-backed ETFs, despite September being gold’s worst monthly price performance since November 2016. Gold ETF holdings gained 7% in the third quarter this year, adding 273mt ($16.4bn).
Total Assets Under Management (AUM) for the world’s gold ETFs stands at 3,880 metric tons, valued at $235 billion.
• NORTH AMERICA was the regional leader once again, increasing holdings by 34.6 mt ($2.2 billion).
• EUROPEAN gold ETFs became buyers again, after seeing outflows in August. They added a healthy 26 mt of gold ($1.9 bn).
• ASIA saw another two gold ETFs launch in China in September, after two new ones debuting in August. There have been seven new gold ETFs open for business in China this year. Asian gold ETFs saw inflows of 6.8mt last month.
• OTHER gold ETFs gained 0.6mt in September. (I have no idea what “Other” regions are.)
On The Retail Front
A crashing lira and rampant inflation in Turkey means that citizens are selling everything they can to buy US dollars, and especially gold. The Turkish lira hit a record low of 8:1 versus the US dollar late in October. The lira has lost 35% in value so far this year. Gold prices in lira have increased 71% at the same time.
Retail gold demand in India is expected to pick up as we enter the fall wedding season and Hindu holiday season. This after all-time high prices and COVID lockdowns suppressed jewelry demand over the summer.
The China Gold Association says that Chinese retail gold demand for the third quarter rose 28.7% from the second quarter. Year to date, Chinese gold consumption is 548 metric tons.
Australia’s Perth Mint announced 62,637 ounces of retail gold sold in September, about 5,000 ounces less than August. On the other hand, retail silver sales of 1,677,383 ounces was nearly a quarter-million ounces higher than August.
In America, sales of gold and silver bullion coins jumped in October. Total ounces of American Gold Eagle coins of all sizes sold in October more than tripled from September, at 72,000 oz. Gold Buffalo coins sales more than quadrupled to 19,500. Sales numbers for American Silver Eagles lagged a week behind in October. Even so, sales of 3,397,000 ounces for the first three weeks of October handily beat the 2,958,500 of September.
JP Morgan says to expect a short-term spike of 2% to 5% in gold prices if the election results in a “blue wave” — the Dems controlling all of Congress and the White House. They say that regardless who wins, deficit spending is going to surge, sending real interest rates more deeply negative. This will support gold prices in the medium to long term.
Similarly Jeff Updike at Forbes says no matter who wins the election, gold will hit $2,500 by the end of next year.
TD Securities joins the chorus of calls for new all-time highs for gold prices after the election, no matter who wins.
Frank Holmes, CEO of US Global Investors says we’re looking at an eventual $4,000 price for gold, no matter who wins the election. “Some are betting on blue, some are betting on red, and I am betting on gold,” he says.
Citi analysts predict a huge bull market for silver is just getting started, but warns that riding that bull is “not for the faint-hearted.” They see silver at $40 an ounce in the next 12 months. They are sticking with their forecast of $2,200 gold by the end of the year, and $2,400 by the end of next year.
In contrast, Credit Suisse says that gold’s consolidation phase will last into the new year. They say that gold prices need to break the $1,993 level to continue the uptrend.
AUSTRALIA GOLD RUSH
Record-high gold prices are causing a modern-day Australian gold rush. Gold mining companies big and small are expanding existing operations or opening new mines. This new gold rush has Australia on the road to replacing China as the world’s largest gold producing nation as early as next year.
It isn’t just multi-million dollar companies striking it rich in the Australian outback. A prospector in the old goldfields near Kalgoorlie in Western Australia hit the find of a lifetime this month. He pulled a single, 9 oz gold nugget out of the ground, that later tested to be naturally 95% pure. Experts estimate the nugget’s value at $30,000 due to its size and rarity.
The government of Venezuela has won an appeal in British courts regarding the ownership of $1 billion of Venezuelan gold held by the Bank of England. The government of Nicolas Maduro sued the Bank of England for the Venezuelan gold reserves, but the British government recognizes Juan Guaido as Venezuela’s president. Guaido was Maduro’s opponent in the 2018 election that most of the world considers rigged. Guaido had requested the Bank of England not release the Venezuelan gold reserves to Maduro, saying he would steal it.
Customs officials have announced big seizures of gold on the Hong Kong border with China, as authorities crackdown on smuggling. Smugglers were caught in six separate instances in the span of four weeks.
A total of 71 kilobars of .9999 gold were seized. Identical smuggling methods were used in all six cases, leading officials to believe that Chinese crime syndicates are selling gold across the border as part of a money-laundering scheme. Gold prices in Hong Kong are far higher than on the mainland.
The BBC takes a look at Peak Gold, and how it probably won’t have a sudden effect on gold prices. (Spoiler: scrap gold sales will increase.)
Jan Nieuwenhuijs thinks that relations are so bad between Germany and Donald Trump, that they will repatriate the rest of their gold from New York if he wins a second term. They are nervous over whether Trump would expand European sanctions to the point where he would lock away Germany’s gold at the New York Fed.
Looking Ahead To Next Month
The biggest influences on gold prices in November will be the US election, and the intensity of the new wave of COVID infections.
The worst-case political scenario would be if there are contested election results like in Florida in 2000. It might take weeks to determine a winner. Even if there is no change to the balance of power in Washington, political fighting between the President and the Democratic House will prevent anything from being accomplished before January.
The best-case scenario for the COVID pandemic would be a successful approval of an effective vaccine. Absent that, approval of treatments to lessen the severity of the disease, like the Remdesivir given to Trump, would give overfilled hospitals some breathing room.
Lockdowns in Europe are going to hit commodities and stock prices, especially energy stocks (oil was down more than 5% on October 28). If the new coronavirus wave hits China, world markets will take a huge hit.
Regardless of what happens, expect gold prices to continue moving with stock prices, and opposite dollar movements.
BEFORE WE LEAVE…
Just to prove that treasures don’t have to be gold, we hear this story out of Cooperstown, New York. A man renovating an old home he purchased found out that the rumors that it was a base for smuggling liquor during Prohibition was true, when he started pulling full cases of whiskey from the 1920s from secret floor panels and fake walls!
This column is intended for educational purposes only. It is not intended as investment advice. – Steven Cochran of Gainesville Coins.