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?
All the headlines that moved gold prices in October boiled down to two things: inflation, and how the Fed planned to deal with it.
Gold spent the first week of October treading water around the $1,750 mark. This ended on the 13th, when gold saw big losses, then big gains, all in one day. Inflation fears rocked the markets that morning when CPI came in much hotter than expected. This sent gold down sharply as bond yields and the dollar advanced.
Later in the day, the release of the September FOMC minutes revealed that most Fed officials are ready to start tapering of QE in November. This sent bond yields higher and the dollar lower. Gold took advantage of this to erase those early losses and jump $26 higher. This triggered stop losses that saw gold end the day up by $36 to $1,795.
Gold gave up most of those gains two days later, when retail sales came in far higher than expected. Combined with strong earnings reports from major companies, the week ended solidly in risk-on mode.
Gold got another chance at greatness on October 20th. The release of the Fed’s “Beige Book” report showed most of the nation reported “significantly higher prices”. The Markit flash manufacturing PMI came in 8 points lower that morning, to a 7-month low of 52.9.
These two reports together painted a picture of high inflation and shrinking economic activity – the very definition of stagflation. This sent gold $30 higher before noon.
This must not have been part of the script on Wall St., as Fed Chairman Jerome Powell was trotted out to say the Fed will for sure begin tapering next month. This sent gold down vertically by $60 to $30 in the red. By the end of the day, prices had pushed up $44 to finish the day with a $14 gain.
The end of the month saw PCE come in at the second record high in a row, giving a big boost to the dollar and pushing bond yields lower. This sent the dollar down $28 early in the session, but the yellow metal managed to erase half those losses by the end of the day.
Factors Affecting Gold This Month
HYPERINFLATION SCARE
Will we see hyperinflation in the US? That’s going to depend on the Fed. A Deutsche Bank survey of investors this month showed that 42% believed that the Fed was going to keep interest rates too low for too long. 46% said that the ECB would do the same thing.
Just some of the economic data that shows high inflation is speeding up:
- Personal Consumption Expenditures hit a 30-year high for the second straight month.
- Consumer Prices (CPI) were up 5.4% year to year for September.
- Wholesale Prices (PPI) were up the most in 11 years, at 8.6% year to year.
- Retail Sales were up 13.9% year to year.
The 5-year breakeven rate in the EU hit a seven-year high of over 2% in the third week in October. The 5-year breakeven rate on Treasuries hit an all-time record high above 3% at the same time. This means that investors expect EU inflation to be a little over 2% over the next five years, and expect inflation in the US to be 3%.
The IMF warned central banks to begin now in establishing contingency plans for persistent, higher inflation, and to make sure the markets understand what will trigger emergency action.
OR IS IT A STAGFLATION SCARE?
Most of the higher inflation is coming from the supply side instead of the demand side. Central banks can fight demand-side inflation with interest rate hikes, but can do nothing to cure supply-side inflation.
This month’s “Beige Book” report from the Fed showed that most of the nation reported “significantly higher prices”. The same day, the Markit flash manufacturing PMI came in at a 7-month low of 52.9.
Higher prices and reduced economic activity is the last thing anyone wants to see. This could mark the start of a global period of stagflation.
ENERGY CRISIS
Anyone remember the Arab Oil Embargo of the ’70s and what it did to the economy? We may be seeing something like that again, if things keep going the way they are.
This winter is supposed to be as bad as last year. Because natural gas prices were so low during the summer, no one bothered to refill storage facilities. Natural gas producers did not expand capacity for the same reason. Now, everyone from Beijing to Berlin are fighting over the small supply of natural gas that is left.
In Europe, energy prices have more than quadrupled, pushing EU inflation to a 13-year high of 4.1%. Energy costs added 24.5% to the inflation reading. Steel and aluminum mills have had to shut down because they can’t afford the electricity to run. Other energy-intensive industries have been forced to follow suit. As the winter gets colder, energy prices will continue to break record highs.
While not as dire as in Europe, natural gas prices in the US have doubled this year. This will mean many people will have to sacrifice other needs to be able to afford heat, in both the US and EU.
Energy shortages in China are causing unannounced blackouts to factories and homes. China, as well as Japan and South Korea, are leaning on their remaining coal power plants to get them through the winter.
Most of India’s electricity comes from coal. Record high coal prices have led to a coal shortage that has crushed India’s power grid. These shortages resulted in the loss of HALF the nation’s power generation capacity in one day.
On the crude oil front, West Texas Intermediate hit $85 a barrel this month. Despite calls for relief, OPEC+ refused to add more oil than the previously planned increase of 400,000 barrels/day each month. US shale companies are hesitant to drill more wells, in case OPEC decides to flood the market.
Larry Fink, CEO of Blackrock, says the world is looking at “a high probability of $100 oil”. He said that government concentration on destroying non-green power before there is enough renewable energy will set off an extended period of energy inflation. “We’re in a new regime,” he remarked.
Central Banks
The FED seems to have backed itself into a corner by waiting so long to taper the largest QE ever seen. The Personal Consumption Expenditures inflation index is the Fed’s preferred inflation gauge. It hit another 30-year high of 4.4% in September. Core PCE also hit a 30-year high.
Some are calling for a Fed rate hike by next March, before inflation gets further out of control. If they stick to their plan of no rate hikes until QE is over, it’s going to be “interesting times,” as the old Chinese saying goes.
Most of the other central banks are facing inflation that is being caused by the global energy shortage.
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The ECB is dealing with multi-decade high inflation in Europe. The most recent consumer inflation reading of 4.1% is the highest seen since 2008.
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Analysts are predicting that record energy prices will push inflation so high that the Bank of ENGLAND will be forced to hike interest rates by the end of the year.
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The Bank of CANADA kept interest rates at 0.25%, but ended its $ 2 billion per week quantitative easing program, AND has moved up the timetable for its first rate hike to the middle of next year to fight high inflation.
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The central bank of BRAZIL raised interest rates a huge 1.5% this month, from 6.25% to 7.75%. The central bank plans to jack interest rates another 1% before the end of the year.
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The central bank of POLAND announces that it will add 100 metric tons of gold to reserves next year.
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Turkish president ERDOGAN conducted a midnight purge of the leadership of the Turkish central bank in October, because three of them refused to cut interest rates. Erdogan has the weird belief that higher interest rates *causes* inflation instead of bringing it down.
His actions have devalued the Turkish lira to a new record low of 9.61 to the dollar. No wonder the people are converting any lira that they have into US dollars or gold as soon as they get it.
Central Bank Gold Purchases
This month’s Central Bank report covers the month of August. The world’s central banks purchased a net 28.4 metric tons of gold in August.
The largest buyer was India, adding 12.9 t. They were followed by the usual buyers of Uzbekistan (0.7t) and Kazakhstan (5.3). The Turkish central bank rounded out the list of buyers for August, purchasing 2.8t of gold.
The only sellers of note were Qatar selling 0.9t and Mongolia selling 0.4t.
Gold ETFs
A stronger dollar and higher Treasury yields hit the price of gold in September, with a net 15.2t of outflows globally. Europe saw the largest outflows, as record energy prices began to bite. Gold ETFs in Europe shed a net 11.5t. The other region showing net outflows was North America, shedding 6.6t. Asia gained a mere 2.4t, with the “Other” category accounting for a minor 0.4t of net purchases.
The largest movers in Gold ETFs were the UK, losing a big 11.9t, followed by the US seeing outflows of 5.3t. Canada added to the North American losses by 1.3t. Inflows were minor, with China (+1.6t), Switzerland (+1.2t), and India (+1.1t) showing the only gains.
On The Retail Front
Physical gold investors continue to keep things jumping at the US MINT. The latest figures, released the third week of October, show that 149,500 troy oz of American Gold Eagles of all sizes were sold this month, along with 38,500 1oz American Gold Buffalo coins.
The YTD total of 1.37 million troy oz of gold bullion sold is the highest since 2010. Sales for the year have a good chance of breaking that level by the time production for 2021 ends at the first week of December.
Sales of 2021 American Silver Eagles are hurting due to production completely stopping in May in order to start minting the new Type 2 design. 1,076,000 ASEs were sold in October, for a YTD total of 26,751,500.
Speaking of American Gold Eagles, we have a sale on random date 1oz American Gold Eagles going on right now at Gainesville Coins!
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The PERTH MINT sold 98,753 oz of gold bullion in September. This is 83% higher than August and 57.7% higher than a year ago. 1,789,926 oz of silver bullion was sold. That was 22% higher than August and 6.7% higher than a year ago.
Year to date, Perth Mint gold bullion sales total 819,029 oz, and silver bullion sales stand at 14,475,515 oz.
Market Buzz
PETER BOOKVAR is looking for big things from gold, noting that “If you inflation-adjusted gold from its 1980 high, it can go to $2,500.”
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The SWISS government has warned gold refiners to increase auditing of gold arriving from the UAE. Dubai has long been the main conduit for “blood gold” and gold money laundering from Africa to travel to Europe. According to the UN, 95% of illegal gold from Africa goes through the UAE. The problem is so pervasive that some European refiners refused to accept gold from Dubai.
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RUSSIA’S Moscow gold market is now linked to the London over the counter gold market. This allows transfer of LBMA-accredited gold trades between Moscow and London without the need to physically move the gold.
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According to data from the Shanghai Gold Exchange, CHINA’S gold demand this year is already higher than the pandemic year of 2020. If trends continue, it will exceed 2019’s demand as well.
Reuters reports that Chinese gold imports through Hong Kong shot up 65% in September, compared to August. That isn’t even the complete picture, since China imports a lot of gold through Shanghai.
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Billionaire investor PAUL TUDOR JONES said in an interview that “clearly inflation is not transitory,” and called it not only the #1 issue facing mainstream investors, but the single biggest threat to society.
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On a similar note, Blackstone CEO Stephen Schwarzman warns that the energy crisis could set off social unrest around the world. “We’re going to end up with a real shortage of energy. And when you have a shortage, it’s going to cost more. And it’s probably going to cost a lot more,”
“You’re going to get very unhappy people around the world in the emerging markets in particular but in the developed world,” Schwarzman said at the Future Investment Initiative. “What happens then, Richard, is you’ve got real unrest. This challenges the political system and it’s all utterly unnecessary.”
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In southeast VENEZUELA, people don’t have access to dollars, and the official currency, the bolivar, is useless (Maduro just ordered it revalued by removing six zeros from the end.) The regional economy only survives because everyone is using gold flakes as money. You can get a haircut, buy groceries, even get a hotel room for the night by paying in gold.
This is made possible by the thousands of small gold miners in the region. Using gold flakes as a medium of exchange has become so commonplace, that many times, people can tell the weight by looking at them. Everything is priced in grams of gold, alongside prices in dollars and bolivars.
The practice is spreading to larger cities in the region, where US dollars, Brazilian reals, and Colombian pesos aren’t widely available to working people. How far the “gold is money” movement grows will depend on whether and when the socialist president Nicolas Maduro cracks down on it.
Looking Ahead To Next Month
Boy, oh boy. The Fed meets on November 2nd and 3rd, so the drama may have already taken place by the time you read this. It seems most of the money is betting that the Fed will announce the start of the QE taper at this meeting, and start the process in the middle of the month.
Expect the stock market to continue to fight over whether we’re seeing the start of hyperinflation, regular high inflation, or stagflation. One huge data point will be where the third quarter GDP lands. There are rumors of rumors that some people in Washington are bracing for a negative GDP number, showing that the economy shrank in the third quarter. No one will be able to deny that we are on the cusp of hyperinflation if this happens.
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Our treasure story this month comes from the Holy Land, where a scuba diver discovered a complete 900-year Crusader sword in northern Israel. The cove where he was exploring was used as a landing spot during the Crusades, where boats would unload men and supplies from large Christian ships. The gentleman who lost this two-handed sword must have been very large and very important, given its size!
– Steven Cochran of Gainesville Coins
This column is intended for educational purposes only. It is not intended as investment advice. Past performance does not guarantee future results.