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 May?
Gold had a rollercoaster ride again in May, but when all was said and done, it had lost less than 1%. Gold prices hit an intraday high of $2,085 in Europe on May 4th but opened in New York at $2,055. It settled at the same level, marking the closing high for the month in the US.
Gold closed above $2,000 for the first time since April 25th on May 2nd. It remained above $2,000 through May 15th. It spent the last half of the month in a spiral downward, posting losses on 8 out of 10 sessions. It managed to overcome a nine-week low to end $14 higher on May 30th, bringing the closing price for the month to $1,977.
Factors Affecting Gold This Month
The banking crisis was still rocking the banking sector in May, lending support to gold prices. If you weren’t a “Too Big To Fail” bank, everyone and their mother was poring over your balance sheet to see how many of your assets had a market price less than their book price. 2,315 banks were considered insolvent when their assets were marked to market in a government survey of banking conditions with a total shortfall of $10 trillion.
Trying to calm the markets after JP Morgan bought failed First Republic for a song, JP Morgan CEO Jaime Dimon said, “There are only so many banks that were offsides this way.” JP Morgan CEO Jamie Dimon declared that “this part of the crisis is over.” (This didn’t prevent the share prices of other regional banks from falling on the news that First Republic had failed, however.)
Former Dallas Fed president Robert Kaplan disagreed with this assessment, saying that the regional banking crisis was far from over and suggested that this was cause enough for the Fed to pause rate hikes in June.
The failures of First Republic, SVB, and Signature lost more money than the top 25 banks in 2008 (not counting Washington Mutual). These three banks were the #2, #3, and #4 largest bank failures in US history.
That said, the banking crisis was overshadowed by the debt ceiling later this month, although questions of liquidity still haunted regional banks.
The debt ceiling crisis was not as friendly to gold as the specter of more bank failures was.
Mark Zandy, chief economist at Moody’s Analytics, forecasts that a US default would wipe out $12 trillion in household wealth and send unemployment to 7% as the economy crashes to levels last seen at the depths of the 2008 Global Financial Crisis.
Economists are warning that even a last-minute debt ceiling deal still has a good chance of pushing the US economy into a recession.
Bond yields were perhaps the most sensitive asset class to the debt ceiling crisis since any bonds that mature or have a coupon redemption during a government default will not be paid until a debt resolution is passed. Since gold fights against bond yields as a store of value and a safe haven, JP Morgan strategists say that a debt ceiling resolution might see the yield on the 10-yr Treasury note to fall to as low as 2% in the first quarter of 2024. Other analysts think that a debt ceiling resolution before the “drop dead” date would probably mark a top for 2-yr Treasuries, reducing the downward pressure on gold prices.
Even so, analysts at most big banks were unanimous in their observation that investors were preferring bonds over stocks when positioning themselves to weather an economic slowdown.
Between the banking crisis and worries about the wider effects on the economy if a debt ceiling agreement isn’t reached, the Fed had a lot to worry about this month. Fed Chairman Jerome Powell said that the outlook on their end was that inflation will not be falling quickly, so the idea of a rate cut was not even on the table.
Federal Reserve governor Philip Jefferson says that inflation is still too high, but it’s too early to know what effects rate hikes have had on the economy. New York Fed president John Williams said, “We haven’t said we’re done raising rates,” predicting that inflation will not get back down to 2% for another 2 years.
The European Central Bank raised rates by 25 bp this month, as expected. This brings the current interest rate to 3.75%. A speech by ECB president Christine Lagarde after the decision drove home the need for more rate hikes to combat inflation and wage pressures (which makes sense since they waited to start hiking rates long after other major central banks).
Other ECB officials said that at least two more 25 bp hikes were needed to fight inflation and that traders who were expecting rate cuts in the first quarter next year will be disappointed.
The Bank of England passed a 25 bp rate hike as well to bring interest rates to 4.5%.
Governor Tiff Macklem of the Canadian central bank said that inflation in Canada risked getting stuck “significantly above” the bank’s 2% target rate. If this happens, the central bank will have to hike rates again. They have paused rates for two months now to assess the necessity for further hikes.
The Reserve Bank of Australia surprised markets with a 25 bp hike to 3.85% on May 2nd since they paused rate hikes in April. The accompanying statement cited “a strong consensus” behind the decision.
The Bank of New Zealand charted the opposite course by raising rates by 25 bp, but announcing a pause for next month.
Bank of Japan governor Kazuo Ueda said their commitment to its long-standing ultra-loose monetary policy remains “unwavering.”
The Turkish central bank voted this month to keep interest rates at 8.5%, in part to help financing as the nation starts rebuilding after the recent earthquakes.
The Argentinian central bank hiked rates by 10 basis points on May 2nd to 91%, a month after raising rates by a full 3% (300 bp). Inflation ignored the hike and escalated above 100%, causing the central bank to go nuclear and raise rates another 6% (600 bp) on May 15th.
Estimates say that Argentina has more US dollars circulating than any nation other than the US itself. Calls are growing to replace the Argentine peso with the dollar, but that would remove the ability of the Argentine central bank to devalue its currency. Some people see that as a positive, considering how often that has happened.
Central Bank Gold Purchases
In the three months to the end of March, central banks added 228 tons to global reserves, the highest rate of purchases seen in a first quarter since the data series began in 2000. The Turkish central bank has been the largest seller of gold this year, releasing nearly 96 tons of gold into the domestic market in March and April to meet massive domestic demand. This move is intended to reduce gold imports, which are a large component of the nation’s current account deficit.
The Central Bank Gold Reserves report from the World Gold Council released on May 3rd covers sales and purchases in March. Globally, central bank gold purchases were essentially flat. Only 100 kg separated buyers (40.4 t) from sellers (40.3 t) for the month, basically an accounting error.
The largest purchase was by mainland China (18 t), followed closely by Singapore (17.3 t). Singapore has recently appeared on the central bank gold buying scene. Other buyers included India (3.5 t), with the Czech Republic purchasing 1.5 tons. France purchased 0.1 tons (100 kg) of gold, which may only be a move of gold from the central bank to the national mint for making coins.
Selling by central banks in March was concentrated in central Asia. Turkey sold 15.3 tons of gold in March for the reasons stated above. This was followed by Uzbekistan, which sold 11.2 tons, and Kazakhstan, selling 10.5 tons. Russia’s central bank was also in the seller’s column, shedding 3.1 tons. Malta came out of nowhere to sell 0.2 tons of gold (200 kg) to round out the month.
Global gold ETFs saw net inflows of 15.2 tons in April. Nearly all of this was due to gold demand in North America, which saw 15 tons of inflows. This was followed by 0.8 tons in the “Other” region and a tiny 0.1 tons (100 kg) in Asia. Europe was the only region to see net outflows, losing 0.7 tons.
(“Other” are Australia, South Africa, Turkey, Saudi Arabia, and UAE.)
On The Retail Front
Final US Mint bullion sales figures for April were 900,000 American Silver Eagles, 170,000 oz of American Gold Eagles, and 60,000 American Gold Buffalos. Bullion sales in May at press time were 900,000 ASEs, as they remain rationed. Only 57,000 oz of AGEs were sold, as the US Mint only offered ¼ oz-sized coins for some reason. May sales of Gold Buffalos were 38,500 oz.
The Perth Mint saw fewer gold bullion sales and increased silver bullion sales in April. Gold bullion sales totaled 80,541 oz, while silver bullion sales totaled 1,947,743 oz. Year-to-date, gold bullion sales were 272,343 oz, 20.4% lower than the same time last year. Recent softness in gold sales can be attributed to near-record high prices. Year-to-date silver bullion sales were 6,489,119 oz, down 16.7% from the same time last year.
The China Gold Association announced that the nation’s gold production has recovered to pre-pandemic levels as domestic demand for bullion and jewelry rebounded.
Shandong Gold Mining, one of China’s largest gold producers, recently announced the discovery of a huge gold deposit with an estimated 580 tons of recoverable gold. At a 4.26 grams-per-ton purity, the estimated value of the deposit is nearly $30 billion.
Number 1 gold mining company Newmont is paying $19.2 billion to buy rival Newcrest, enlarging its gold and copper holdings and removing the main source of confusion over its name (like Goodyear and Goodrich in tires).
Gold prices in India hit an all-time settlement high of 57,200 rupees per 10 grams ($2,149/oz) this month. Gold prices set an even higher intra-day record of 61,490 rupees per 10 grams ($2,310/oz) the same week.
Also in India, on May 19th the government announced that it is demonetizing its largest banknote, the 2,000 rupee note. Many people hoard these notes as a store of value. The demonetization is an attempt to push this hoarded cash into the banking system.
This is causing more trouble than it needs to because there is a ten-note daily limit on bank deposits of 2,000 rupee notes. This is driving many people to avoid the hassle of multiple bank visits just for this, and using the big notes to buy gold. The Hindustan Times reported that gold sales jumped 10% to 20% the weekend after the announcement.
Gold marketers in the UAE are making bank thanks to sanctions against Russia over the invasion of Ukraine. They’re buying Russian gold at a discount, then “laundering” it by melting it down and recasting it in order to sell it on the open market at a profit.
It’s winter in the Southern Hemisphere, and South Africa’s battered state-owned electric monopoly Eskom is predicting that widespread blackouts will hit platinum mines hard, which will cause a greater platinum shortage.
The World Platinum Investment Council estimates that the deficit in platinum will increase 77% this year to nearly 1 million ounces.
More Americans view gold as a better long-term investment than stocks for the first time since 2013, according to a recent Gallup poll.
JP Morgan is recommending that investors actively trim their equity holdings and corporate bonds, hold on to cash, and buy gold to adjust to growing recession risks. Those risks include the Fed intentionally causing a recession by hiking rates in a vulnerable economy.
UBS gives their top three reasons to buy gold right now:
Central banks are not going to let up on near-record gold purchases
The dollar is expected to weaken as the Fed dials back rate hikes
Safe-haven demand will grow due to recession risks
They estimate that gold prices will reach $2,100 by the end of the year.
A Bank of America analyst says gold prices could rise to $2,500, but only if the Fed pauses rate hikes while inflation is still high and gold ETF demand improves significantly.
ANZ is forecasting that gold will hit a new record high of $2,120 in the first quarter of 2024.
Andrew Axelrod says that if the commercial real estate sector collapses, it won’t matter what the Fed does. The resulting banking crisis could send gold to $3,000 next year.
A US judge this month threw out a 2014 investor lawsuit charging HSBC and the Bank of Nova Scotia (along with several other banks) with conspiring to manipulate the Silver Fix. The judge said that the plaintiffs could not directly link their market losses to the two banks and therefore lacked legal standing to sue the banks under anti-trust or commodities exchange laws. Deutsche Bank, which had also been named in the suit, settled out of court with the plaintiffs for $36 million in 2016.
Looking Ahead To Next Month
The debt ceiling crisis this month pushed short-term Treasury yields higher on government default risks, kicking off the summer doldrums early. Once this is all out of the way, contagion in the banking sector promises to be a major influence on gold since so many banks are technically insolvent.
The Fed is almost universally expected to pause rate hikes in June. This should weaken the dollar, supporting gold prices that will be battling the usual summer doldrums.
If you’re in California, there’s a new gold rush. Called “flood gold,” recent major storms have torn loose placer gold from deposits high in the mountains to drop them in streambeds across the state. This has hundreds of gold panners hitting the streams and brooks in scenes reminiscent of the original Gold Rush of 1849, more than 170 years ago.
– Steven Cochran of Gainesville Coins
Disclaimer: This column is intended for educational purposes only. It is not intended as investment advice. Past performance does not guarantee future results.