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 August?
This was a rough month for gold, as central bank rate hikes sent the dollar to 20-year highs and US markets began to think that inflation has already peaked.
The Bank of England raised interest rates by 50 bp as expected on August 4th, but its forecast of a 15-month recession starting by the end of the year AND 13% inflation shook markets and sent gold to its first settlement over $1,800 since June 30th.
A huge beat on non-farm payrolls the next day sent the dollar zooming, which tanked stocks and gold. Gold fell $25 immediately after the report, but made up half of the loss by the close of the day.
The damage was only temporary. Gold prices stayed above $1,800 for the entire second week in August, peaking at $1,815 on Friday the 12th. Gold then fell into a string of heavy losses, losing $67 over six days. It was guaranteed to end the month with a loss when the DXY dollar index broke above the 109 mark to hit a 20-year high on the 29th.
August marks the fifth monthly drop in a row for gold, the first time this has occurred in four years.
Factors Affecting Gold This Month
FED POLICY
The Fed’s unswerving rate hike policy is pushing the dollar and bond yields to multi-decade highs, both of which are bearish for gold. Even though some (but not all) indicators point toward inflation beginning to top out, the Fed has expressed the intention of keeping rate high until inflation is well and truly dead.
St. Louis Fed president James Bullard has been at the forefront of urging the Fed to go big and go early on rate hikes. He continued his media circuit in August, calling for more 75 basis point rate hikes at every meeting, saying that it was best to front-load the rate hikes to hit inflation hard before it rose any further.
Other Fed officials sounded much the same tune in August. New York Fed president John Willaims says that rates will go higher and remain high longer than the market is hoping for. He said that raising rates is “not something we’re going to do for a very short period and then change course”
A new talking point among Fed officials is real interest rates (interest rates that are higher than inflation). Williams, Richmond Fed president Tom Barkin, and Cleveland Fed president Loretta Mester all emphasized the importance of getting real rates back into positive territory. Negative real rates are bullish for gold prices, and this talk has likely lowered demand.
The reaction to Fed Chairman Jerome Powell’s speech at the international central bankers’ forum in Jackson Hole, Wyoming proved that the market didn’t think the Fed was really serious. The stock market melted down after his aggressive speech, with the Dow losing 1,000 points, the S&P 500 falling 3.5% and the Nasdaq ending 4% lower.
INFLATION
High inflation is already hurting economic activity in some countries. Most of this is being caused by energy and food shortages, which are things that central banks can’t fix. This version of stagflation (high inflation during a recession) is especially hard to stop. Right now, European countries are either in stagflation or on the cusp.
The US economy is arguably in the best condition of any major nation. A deep recession is not anticipated, as inflation seems to already be moderating. It looks like 2 quarters of shrinking GDP was not a reliable indicator of recession after all.
In fact, there are scattered signs that inflation in the US may already be peaking. Consumer prices fell slightly on an annual basis to 8.5%, but the encouraging news was that the CPI did not rise at all from June. Lower fuel prices were offset by higher food and shelter costs.
PCE, the Fed’s favorite inflation gauge, fell 0.1% from June, and fell to 4.6% from 4.8% on an annual basis. Those improving PCE numbers have Atlanta Fed president Raphael Bostic favoring a 50 bp hike in September, rather than a 75 bp hike.
The job market still looks tight enough that moderately higher rates shouldn’t cause a big jump in unemployment,. Nonfarm payrolls were almost double expectations (528,000 est 258,000) Private sector payrolls now exceed pre-COVID levels. The latest JOLTS job openings report shows almost twice the number of jobs as the number of available workers – another sign we aren’t in a recession.
CHINA
The Chinese government is in crisis mode as the economy is on the verge of a total meltdown. The real estate sector, which is 29% of the Chinese economy, is already there. This is helping Chinese gold demand as people rush to buy gold as a safe haven and as a preserver of wealth against a yuan that is at a 2-year low.
The Chinese central bank cut four different interbank interest rates in one week this month to expand the money supply, but it can’t afford to cut benchmark interest rates and devalue the yuan any more than it has.
Residential home sales were down by an unbelievable 28.9% in July, marking the 11th month in a row that prices have fallen. Hundreds of thousands of homebuyers are staging a “mortgage boycott”, refusing to make mortgage payments until their delayed units are built (if they ever are).
Most concerning to the government is youth unemployment hitting a record high of 20%, signaling a high possibility of social unrest. The unemployed include more than 10 million college graduates. Illustrating that this is not limited to factory workers.
DOLLAR STRENGTH
King Dollar is back, thanks to Fed rate hikes. While this lowers the cost of imports for Americans, it raises prices for everyone else. It also drops the dollar price for commodities such as gold and oil, while at the same time making them more expensive in other currencies.
The DXY dollar index rose above 109 for the first time in 20 years this month. Part of this huge rebound in the dollar was from safe-haven demand over the Chinese economy. Another factor is the common perception that the ECB has waited too long to raise rates, and will send the region into a deep depression while trying to fight stagflation.
Conditions in Europe have reached the point where the euro hit parity with the dollar for the first time since 2002 this month. The weakness in the euro reflects the weakness of the EU economies as Russia cuts off natural gas supplies in response to European military support of Ukraine.
Central Banks
The Fed isn’t alone in being forced to raise rates to wrestle inflation back to normal levels. The ECB raised interest rates for the first time in eleven years, to bring them to zero from negative territory for the first time since 2014.
The Bank of England raised rates 50 basis points to 1.75%, but as we mentioned before, the pain in the UK is just beginning. It is assumed that rates will have to rise to 4% or more to kill stagflation.
Central banks rarely raise interest rates during a recession since it makes conditions worse for consumers and businesses, but this time, they have no choice.
Central Bank Gold Purchases
This month’s central bank gold purchases report from the World Gold Council covers the month of June. There are two big things learned from this month’s report. First, no central bank sold gold in June. Second, Iraq tops the list with a huge 34-ton purchase of gold. This is the first time that the Iraqi central bank has bought gold since 2018.
Other buyers were Uzbekistan at 9.8 tons; Turkey at 7.7 tons, Kazakhstan at 4.2 tons, India at 3.7 tons, and the Czech Republic, with 0.5 tons purchased.
Gold ETFs
Globally, gold ETFs experienced 81 tons of outflows in July. This was the third consecutive month that gold ETF holdings shrank. The main culprit has been Fed rate hikes, which increased bond yields and sent the dollar to a 20-year high. Year-to-date, gold ETFs still gained 153 tons.
The big losers this month were the large US gold ETFs. All told, North American gold ETFs saw 50.3 tons of outflows. Most redemptions occurred before the Fed’s second 75 basis point rate hike in a row in late July.
European gold ETFs saw 38.1 tons of outflows, mostly in UK funds. Most of the losses came after the ECB startled markets by raising rates by 50 basis points, a much-larger hike than anticipated.
Asian gold ETFs reversed the trend of large outflows in July, seeing 8.1 tons of inflows. This was nearly all in Chinese gold ETFs, on rising safe-haven demand as the government seems to be losing control of a flailing economy.
To finish the picture, gold ETFs of the “Other” nations saw inflows of 0.7 tons.
On The Retail Front
American Silver Eagle bullion coins are back on allocation at the US Mint, which means that only 850,000 were sold to distributors. Plunging gold prices contributed to lackluster demand for official gold bullion coins. 46,000 oz of American Gold Eagle of all sizes were sold in August, with 17,500 1oz Gold Buffalo coins. This compares to 64,600 oz and 39,500 oz sold in July, respectively.
The American Platinum Eagle (APE) made another surprise appearance on the sales charts, selling 1,000 coins. This brings the YTD total for the APE to 80,000.
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The Perth Mint saw increased demand for its bullion products in July, compared to June. 79,305 oz of gold bullion (+21%) was sold in July, along with 2,465,513 oz of silver bullion coins and bars (up +62%).
General Manager for Minted Products Neil Vance cited extremely high demand from North America as a major factor in silver sales, noting that they have had to keep silver coins on allocation.
Market Buzz
Chinese gold imports from Switzerland hit a 5-year high of 80 tons in July, up 146% in June. This is another reflection of the stampede into gold by Chinese citizens as the yuan drops in value and the government is forced into increasingly frequent market interventions to prevent the economy from collapsing.
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Switzerland isn’t the only place China is getting gold. Net gold imports from Hong Kong hit 48.77 tons in July, a nine-month high.
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Lawrie Williams at Sharps Pixley reminds gold investors that even though gold had a horrible August, it is still outperforming other assets YTD:
• Gold: -4.49%
• Dow Industrial Avg: -11.79%
• S&P 500: -15.41%
• NASDAQ: -23.31%
• Bitcoin: -58.45%
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Michael Nowak, former global head of JP Morgan’s precious metals trading division, has been convicted of 13 counts precious metals price manipulation and wire fraud. (How many does that make now?)
Looking Ahead To Next Month
Next month is the first FOMC meeting since July. There will be plenty of time for new economic news in the meantime, as the Fed won’t meet until September 21st. Hopefully, it will be good, and we won’t see a fed-induced recession for Christmas.
The old saying “Sell in May, go away, come back on St Leger’s Day” meant wait until September for the market to improve. Here’s hoping that this will prove true this year, but I’m reminded of the Chinese proverb about “interesting times.” If Europe and China can’t get their act together, the dollar will remain the Godzilla of the currency wars.
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In treasure news, the largest gold nugget found in Scotland in 400 years has gone on display at the Univeristy of Glasgow. The interesting thing is that it wasn’t found by using a metal detector. The finder was a “gold sniper”, which involves snorkeling in a stream with your face close to the bottom.
The bad part is that any gold or treasure found in Scotland automatically belongs to the government.
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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