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 gave back all of January’s gains in February in choppy trading, ending the month down about $10 for the year. Things started off badly on February 2nd, when the Fed, ECB, and Bank of England all hikes rates and announced that rates would be moving higher for longer than previously estimated. This sent gold down $34 to $1,916 an ounce by noon, before recovering to $1,931.
The big economic bombshell hit on February 3rd, when the non-farm payrolls report hit showed 517,000 jobs had been created in January, versus expectations of 187,000. This was more than double the 223,000 jobs created in December.
Among other drastic reactions, March gold settled $54 lower at $1,876,and spot gold lost $48 to end at $1,864. Total losses for the first week in February were $69 for gold futures and $58 for spot gold.
Gold was unable to regain the $1,900 level for the rest of the month. The closest it came was $1,890 on February 8th. Gold had a bad week at the end of February, falling six out of seven sessions to fall from $1,850 to $1,817 on February 24th. End-of-month portfolio adjustments and profit-taking pulled prices $20 higher on the last two days of the month to $1,837 an ounce.
Factors Affecting Gold This Month
INFLATION SCARES
It wasn’t just the economic atomic bomb of the half-million jobs gained in January that sent inflation panics through the market. Bond yields climbed through February on inflation fears, with the yield on the 10-year note rising from 3.4% to touch 4% near the end of the month before settling at 3.925%
Inflation came in higher than expected in January. The Consumer Price Index grew by 6.4%, beating expectations of a 6.2% reading. Core CPI was also higher than expected, up 5.6% versus estimates of 5.5%. Retail sales gained 3% versus 1.9% expected, with core retail sales (excluding autos) smashing expectations of 0.9% by posting a 2.3% gain.
Wholesale inflation in the US hit a four-month high when the PMI came in at 47.8, rising from 46.9 in December.
Personal Consumption Expenditures is the inflation rate that the Fed lends the most credence to. January PCE was 5.4%, much higher than the 5.0% expected. Core PCE, which strips out fod and energy, rose 4.7% against estimates of 4.3%
In other markets, the CPI in Europe was 8.6%, as the ECB continues to be behind the 8-ball in their inflation-reduction efforts. EU service sector hit a 9-month high of 52.3 against expectations of 50.0. British PPI also surprised to the upside, posting a gain of 53.0 from 48.5. Estimates were for a much smaller gain to 49.0.
The yield on the 2-year Treasury note hit a 16-year high of 4.8% at the end of the month, while the 10-year yield hit 3.9%. JP Morgan analysts say that stock traders are once again ignoring reality by betting on a Fed pivot in the second half of this year. They recommend following the bond market, which is signaling rates will stay higher for longer.
FED-INDUCED RECESSION FEARS
Senior officials at the Federal Reserve were all reading from the same playbook this month. The theme for the month was to discount signs of inflation slowing in some sectors while emphasizing that rates will have to go higher and stay there longer to get the job done.
Unfortunately for regular people, the Fed’s yardstick for beating inflation is for the economy to slow to a crawl, and significant numbers of people losing their jobs to bring unemployment higher.
Some Fedspeak Highlights:
Fed Reserve Board member Christopher Waller: “It might be a long fight, with interest rates higher for longer than some are currently expecting… I am prepared for a longer fight to get inflation down to our target.”
Philly Fed president Patrick Harker warns that the Fed may need to raise rates above 5%. How far that ends up being “is going to depend a lot on what we are seeing.”.
Richmond Fed president Thomas Barkin: “Inflation is normalizing but it’s coming down slowly. I just think there’s gonna be a lot more inertia, a lot more persistence to inflation than maybe we’d all want.” He supports 25 bp hikes going forward, so as not to overshoot the correct rate level, whatever that may be.
Cleveland Fed president Loretta Mester said that she would have supported a 50 bp hike in January to get rates to 5%. She believes that rates will have to be higher for some time in order to get inflation back to 2%. St. Louis Fed president James Bullard concurred on both counts.
MARKET VOLATILITY
Gold and bonds weren’t the only asset gyrating around inflation and rate hike news. Stocks had a rough month as well, as choppy trading gave way to regular sell-offs in the second half of the month. The Dow fell 4.2% for the month. The broader indices fared better than blue chip stocks. The S&P 500 lost 2.6% in February, while the tech-heavy Nasdaq only lost 1.1%.
Central Banks
This month’s stronger-than-expected inflation news is pushing central banks to double down on rate hikes. One survey showed that markets expect the Fed to raise rates to 6%, the ECB to 4% and the Bank of England to 5% before they stop raising rates.
February started with a 25 bp rate hike by the Fed, as assumed. This was followed on February 2nd by the Bank of England raising rates by 50 bp to 4%. At the same time, the ECB hiked rates by 50bp, warning markets that it was going to hike another 50 bp next month. The ECB started fighting inflation much later than other major central banks, and is playing catch-up.
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The Australian central bank has been spooked that inflation has gone down. It took any talk of pausing rate hikes off the table this month. The only question is whether the next hike is 25 or 50 bp. Bank governor Philip Lowe told reporters that the pain of higher rates was worth paying in order to bring inflation down.
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The Mexican central bank also surprised markets. Banco de Mexico hiked rates by 50 bp this month, instead of the 25 bp expected.
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The Swedish central bank hikes rates 50 bp to 3%, but said its work wasn’t done to kill inflation running at a 31-year high. It also announced that it would begin selling off the bonds on its balance sheet that accumulated during its own QE program.
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The Swiss central bank put markets on notice that persistent inflation has opened the door to more rate hikes in the near future.
Central Bank Gold Purchases
The world’s central banks purchased a net 28.1 tons of gold in December. The big buyer was China, which followed up a 32-ton purchase in November with 30.2 tons. China has famously considered the amount of gold it owns a state secret, so the recent revelations are serving a political purpose on the international stage.
This healthy purchase was nearly negated by Kazakhstan selling 28.7 tons of gold in December.
There was only one other central bank selling gold in December, Kazakhstan’s neighbor Uzbekistan. Other buyers included Turkey (24.8 tons), Croatia (1.9 tons), and India (1.1 tons).
It is assumed that the gold purchase by Croatia was to meet part of the capital requirements necessary to join the EU.
Gold ETFs
Physical gold-backed ETFs fell by 26 tons in January, as outflows in Europe and Asia dwarfed the demand in North America.
North American gold ETFs saw 9 tons of inflows in January, led by 85 tons in the US.
European gold ETFs fell by 33 tons, with UK funds seeing 20.6 tons of outflows.
Asian gold ETFs shed 4 tons, 3.3 tons of which were from China.
“Other” nations saw 1.7 tons of inflows, with Turkey being the top buyer at 1.6 tons.
(“Other” nations are Australia, South Africa, Turkey, Saudi Arabia, and UAE)
On The Retail Front
After a good couple of weeks, 2023 American Silver Eagles are once again being allocated (rationed) by the US Mint.
Anyway, 3,949,000 Silver Eagles were sold in January, but only 900,000 in February.
163,500 ounces of American Gold Eagles in all sizes were sold in January, but only 48,000 oz in February.
59,000 American Gold Buffalos were sold in January, but only 15,500 in February.
The drop in gold bullion sales by the US Mint can be traced to the big fall in gold prices this month that wiped out year-to-date gains.
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The Perth Mint in Australia reported 64,395 ounces of gold bullion bars and coins last month. This is 6% higher than in December, but 3% lower than in January 2022.
1,233,344 ounces of silver bars and coins were sold, a big 25% drop from December, and a huge 48% drop from last January.
A Perth Mint spokesman noted that January is the traditional summer holiday month in Australia, which affected demand.
Market Buzz
Mississippi is leading the “hard money” into new territory. Not only are they finally removing state sales tax from bullion purchases, but a proposed bill will also remove any capital gains from bullion sales on investors’ FEDERAL income tax.
A bold move, and one certainly to be challenged, since states normally cannot supercede Federal law.
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Degussa says that they expect gold to continue to rally through 2023 as investors work to preserve their purchasing power and hedge against market volatility. Chief Economist Thorsten Polleit predicts gold to hit a peak of $2,200 this year, with an average price around $2,000.
Additionally, he sees silver peaking at $29 with an average price of $26.
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Ole Hansen at Saxo Bank talks about how stubborn inflation forced the Fed’s hand and killed gold’s $340-dollar rally this month. Fed policy has pushed bond prices higher and strengthened the dollar, both of which is bad for gold.
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BBG macro strategist Mike McGlone predicts that the Fed will tighten enough to send the world into recession before it begins to loosen policy. He believes that gold is still in a bull market, despite giving back gains in February. Once disinflation and recession set in, he expects gold to hit $2,000 “and never look back”.
Jan Nieuwenhuis goes behind the scenes of the Chinese gold market and has determined that the Chinese government owns twice as much gold as they admit to having.
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An article at the IMF of all places gets into the nitty gritty of the death of bimetallism and the birth of the Gold Standard, in “Gold, Silver, and Monetary Stability.” I learned a lot from this article, and you probably will too.
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Brazil has busted a gold smuggling ring that used fake invoices and shell companies to “launder” 13 tons of gold illegally mined in the Amazon to New York and Dubai. The scheme netted nearly $800 million for the crooks, but authorities have only been able to seize $380 million from the dozens of companies and individuals involved.
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Looking Ahead To Next Month
Our treasure story this month is actually a tale of charity. An anonymous benefactor has donated 120 gold bars weighing a total of 60 kg to a village in northeastern Japan that is still trying to recover after it had been nearly wiped out by the Fukushima earthquake and tsunami in 2011.
– 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.