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 February?
Gold didn’t have a very good month in February, closing at a second monthly loss in a row. This culminated in a $53 drop in spot gold on the last trading session of the month, hitting $1,716 an ounce before recovering back to $1,730. This puts gold on track for the worst month in four years.
The pain this month wasn’t limited to gold. Treasuries had a major sell-off, and high-flying tech stocks took a beating. This was caused by several things, but it can all be traced back to bets that the economy will recover faster than the Fed thinks it will.
Factors Affecting Gold This Month
SIGNS OF IMPROVING ECONOMY
Most of the economic news from the government this month came in above expectations. This buoyed market sentiment, and pressured gold. For example, retail sales increased by 5.3% in January, helped by the $600 stimulus checks sent out by President Trump. Wholesale prices rose 1.3% in January, the largest monthly jump since 2009.
On February 17th, gold formed a death cross, after losing $70 an ounce over four sessions.
It wasn’t just economic news boosting investor sentiment. The COVID vaccination program finally started getting into gear.
The US started the month with more people who have had at least one shot of the coronavirus vaccine than there were active cases. COVID infection rates are slowing as more people are vaccinated. Faster rates of vaccinations have people hoping that things will get back to normal by Christmas. Investors are changing their portfolios now to take advantage of it.
However, new more contagious strains of the coronavirus from Britain and South Africa are causing faster infections this month. Health officials are accelerating vaccinations while pharmaceutical companies test new versions aimed at stopping these strains.
Higher bond yields were the major direct driver of gold prices in February. The yield on the 10-year Treasury note broke above 1.3% on the 17th, and was partly responsible for gold prices entering a death cross the same day.
These rocketing bond yields are a direct result of the market thinking inflation is just around the corner. 10-year yields started February at 1.117%. It hit 1.2% on the 7th, 1.3% on the 16th, and 1.4% on the 24th.
More than $50 billion worth of bonds were sold in one session on the 25th, pushing yields over 1.6%. The yield on the 10-year Treasury eased back to 1.5% on the 26th, but analysts warn that there is more to come.
Higher Treasuries yields have sparked a “reflation trade” in the stock market. Investors are selling tech stocks and “stay at home” stocks, in favor of companies that will benefit the most from an end to the COVID epidemic. This rotation has been painful for the market as a whole, as stocks alternate between touching new highs, and getting battered down.
Growing worries of inflation suddenly rising are hitting stocks that will be adversely affected, and boosting bank stocks, which do better during inflationary times.
INFLATION WORRIES OVERBLOWN?
The Fed and the Biden Administration aren’t joining in on the market’s stress. In their estimation, a little inflation right now would be a -good- thing. It would show that the economy, and not just the stock market, is recovering from the pits of the COVID depression. It will take some time before the wider economic damage has healed.
Economist Carl Weinberg says that inflation expectations by markets have “detached themselves from reality.” The Fed has promised lower for longer rates, and is focused on unemployment rather than holding a particular line in the sand regarding inflation.
Paul O’Connor, head of multi-asset management at Janus Henderson Investors, disagrees. “Markets are expecting that [tapering] to be a 2022 story, however we are seeing sizable upgrades to U.S. GDP. Somewhere in the middle of this year the discussion around tapering is going to have to take place,” he said.
Bitcoin hit several new highs in February, breaking above $50,000. This was spurred by Elon Musk announcing that Tesla had purchased $1.5 billion worth of Bitcoin. Other big investors soon followed suit. These moves enticed speculators to dump other assets such as gold and try to ride Bitcoin to a big payday.
The current worldwide physical silver retail product shortage continues, exacerbated by the “silver squeeze” ploy. People with zero comprehension of how ETFs work thought that they could put a short squeeze on SLV and/or the COMEX shorts. The SEC changed its rules in 1980 to stop the Hunt Brothers, who DID almost corner the silver market. It’s now impossible to hold enough silver futures contracts to corner the market.
This doesn’t mean that these thousands of retail investors and meme lords didn’t affect the price. On February 1st, 1 BILLION oz of silver traded on the London OTR market. The price briefly touched $30, (the highest price since 2013) before falling in afternoon trading.
On the COMEX, it was much the same story. The most-active silver futures rose as much as 13% to $30.35 an ounce, the highest since February 2013. SLV, the world’s largest silver ETF, saw Authorized Participants exchange 37 million ounces of silver for SLV shares to meet demand.
ETFs don’t have a limited number of shares like a regular company. The number of shares goes up and down to meet demand, driven by Authorized Participants. To learn more about how precious metals ETFs work, check out our video here.
The Silver Institute estimates that silver demand this year will hit an eight-year high of just over a billion oz. Industrial demand is expected to hit 510 million oz, with physical bar and coin demand about 25% of the total.
While production at primary silver mines is expected to fall, these mines only provide about one third of annual silver production. Most silver is mined as a by-product in copper, lead, or tin mines. As copper trades at 10-year highs in anticipation of infrastructure stimulus in the US and China, more copper and silver will be mined.
The BANK OF ENGLAND has been talking about imposing negative rates again. Officials there say that they would need to give banks a six-month warning before pushing rates negative, so that they could adequately prepare. (which will cause economic panic six months before they are actually implemented)
Fed Chairman Jerome Powell says unemployment at 6.3% is too high. The “real unemployment” (by which he means U6) is closer to 10%. (U6 was 11.1% that day). He noted during his testimony before Congress, that more than 10 million people are still out of work. This is 4.4 million more than before the pandemic, hitting low-income households the hardest. He also said that ”“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” Still, the bond and stock markets don’t believe him. Activity in both markets are exactly what a “taper tantrum” looks like. This time, though, no one on the Fed side is even talking about it.
Central Bank Gold Purchases
The December 2020 Central Bank gold reserves report was released this month. Again, we are seeing developing nations in central Asia buying, while large nations are preoccupied with providing quantitative easing to their giant economies.
Uzbekistan was the big buyer in December, adding 8.4 metric tons. This is the fourth month in a row that Uzbekistan has purchased exactly 8.4t. It has also made them the top central bank gold purchaser for four months in a row.
Other buyers included India for 3.7t, and Kazakhstan for 1.5t. The only sellers of note were Turkey and Mongolia, selling 2.8t and 2.3t, respectively.
Globally, gold ETFs saw 13.8t of inflows in January, but all the heavy lifting was done by Europe. European gold ETFs saw net inflows of 17.5t ($1.1bn). North America saw a net outflow from gold ETFs of 6.3t ($303mn). Asian gold ETFs saw minimal action in January, while the “Other” category gained 2.7t.
On The Retail Front
Falling gold prices haven’t dented physical demand. Most government and private mints simply can’t keep up with the demand for physical gold and silver bullion investment products.
The US Mint sales as of February 26 showed a final total of 4,775,000 2021 American Silver Eagles sold in January, and 3,191,500 sold so far in February. This is already almost half the total ASE sales in 2019.
2021 American Gold Eagle sales also continue hitting multi-year highs for the first two months. 220,500 troy oz of AGEs of all sizes were sold in January, and 125,500 ozt in February as of the 26th. Gold Buffaloes are also seeing heavy demand. The final total for January was 61,500 ozt in January and 16,000 in February.
Silver Eagles and Canadian Silver Maple Leaf bullion coins have been under allocation (rationed) since early January.
Silver Eagle shortages in the first quarter have been compounded by plans to change the reverse of the coin by mid-year. The US Mint is running a balancing act between meeting present Silver Eagle demand that is at multi-year highs, and having enough of the new design ready for the rollout planned for this summer. Sales of the new design are expected to dwarf monthly records, if the Mint can actually meet demand.
A statement I received from the US Mint gives details:
“In 2021, demand for gold and silver has continued to remain strong with the U.S. Mint selling 220,500 American Eagle Gold Bullion Coins in January alone, compared to 56,500 in January of last year. This is an increase of 290% over last year.
In 2021, the U.S. Mint will have a limited production window to produce current design American Eagle Gold and Silver Bullion Coins. The recently announced redesigned American Eagle Gold and Silver Bullion Coins are slated to launch during the summer of 2021, and coins for that program must be produced in advance of the launch date.
Due to continued exceptional market demand, a limited number of blank suppliers, and plant capacity, the allocation model currently in place for distribution of the U.S. Mint’s silver bullion coins to Authorized Purchasers will remain in place for the foreseeable future. In addition, the U.S. Mint is adopting an allocation model to distribute its gold and platinum bullion coins to Authorized Purchasers.”
Perth Mint silver coin sales were up by 23% in January, with more than 1.1 million oz sold. 76,103 ozt of minted gold products were sold in January, down less than 1% from December
General Manager of Minted Products Neil Vance said “we are still selling everything that we can currently make in silver” while trying to replenish stocks of gold bullion coins.
The current shortage of silver bars and coins is due to fabrication bottlenecks, which have been made worse by mints being forced to reduce production to comply with COVID safety measures. There is plenty of actual silver to go around. Companies just can’t turn 1,000 oz Good Delivery silver bars into retail products fast enough.
A reduction in gold import duties by the Modi government and the nation’s economic revival from COVID lockdowns have revived jewelry and investment gold demand in India. The spring and fall wedding seasons were effectively canceled by COVID lockdowns. As a result, this spring is jam-packed with weddings, and all those brides need new gold jewelry and gifts. Commercial gold demand in India hit 67 tons just in January.
Chinese gold demand during the Lunar New Year’s celebrations exploded, according to the China Gold Association. Gold sales were 80% higher than last year, when festivities were curtailed by the COVID outbreak. Government orders to stay near home instead of traveling led many millions of Chinese to spend money set aside for traveling on gifts for themselves.
COVID-related mine closures resulted in gold production for 2020 falling by 5.2%. South Africa was the hardest hit of the major gold producers, with 10.9% less gold mined in 2020. China’s gold production fell by 7%, but Australia increased its gold production by 4.3%.
PLATINUM was the big story in precious metals in early February, hitting a 6-year high on 14th. Supply shortages this year are due to mine closures from COVID in South Africa. This is the third year in a row of supply shortages in platinum.
The immediate effects of the platinum shortage have been pushed back temporarily, as automakers have shut down factories due to a shortage of microchips used in cars and trucks.
With the gold crush that’s going on, some investment banks are focusing on the “here and now”, rather than 12 months from now.
Standard Chartered sees “strong support” at $1765, but if that falls, the next resistance is at $1690. They do note that gold is heavily in oversold territory right now.
Commerzbank has much the same view, calling $1760 and $1670 as resistance.
Citi addresses the present Bitcoin mania, predicting that we will continue to see gold and BTC move lockstep in opposite directions. They have lowered their year-end forecast to $1950, down from $2100.
Goldman Sachs is suggesting that investors put 1% of their portfolio in Bitcoin, because demand is greatly outstripping supply right now. On the subject of gold, they have revised their year-end forecast down from $2300 to $2000.
Looking Ahead To Next Month
Boy, what a ride we had this month. I’m not going to predict anything for March, except some sort of fiscal stimulus out of Washington, and the Fed trying to talk the market down from its inflation panic. Are we going to see Powell try Yield Curve Control? The Aussies and Japanese have tried it already, and aren’t really big fans.
We end this month with the story of a Canadian antique dealer who purchased the contents of a deceased Irish music teacher’s house for $10,000 only to find she had been a millionaire hoarder!
He told the Irish Sun: “Our most impressive finds included wallets full of cash, a 100-ounce silver bar, and bags full of gold and diamond rings.”
This column is intended for educational purposes only. It is not intended as investment advice. Past performance does not guarantee future results. – Steven Cochran of Gainesville Coins