September 2020 in Precious Metals, by Stephen Cochran

From Steven Cochran of Gainesville Coins:

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.

Gold ended August on a down note, logging the first monthly loss in six months. December gold futures lost 3.7% in August, while spot gold lost 4.4%. Silver parted ways with gold in August, riding its rally by ending the month 18% higher on the COMEX, and 15% higher in the spot market.

What Did Gold Do in September?

Gold went into “consolidation mode” in September. The month started with a meltdown in tech stocks. Gold prices fell as speculators suddenly had to meet large margin calls. Gold futures, which are more liquid than physical gold, lost $44 between September 2nd and 4th. Spot gold lost $38. Both ended the week at $1934. Spot gold spent the next two weeks trending between $1930 and $1955 for the most part.

Supreme Court Justice Ruth Bader Ginsburg died the night of Friday, September 18th. Stocks had ended the week shaky over a new wave of COVID in Europe. Countries across Europe were locking down and going into crisis mode as COVID infections surged.

Everything fell when markets opened Monday. The fight over Ginsburg’s replacement on the Supreme Court so close to the Presidential election wiped out any chance of a new stimulus bill. News Monday that someone had mailed a letter containing ricin powder to President Trump frightened markets more.

If that wasn’t enough, the dollar surged on safe haven demand after China made repeated incursions over the Taiwan Strait, forcing Taiwan to scramble fighter jets nearly 40 times over the weekend.

December gold futures fell $51.50 to $1,910.60 that Monday. It would end the week down $95.80 – the worst week since the March market meltdown. Spot gold fell $36.50 to $1,912.40 on the 21st. It would end the week $87.70 lower.

Gold attempted a run at the $1,900 mark during the last few days of the month, gaining $36 over the first two days of the week.

As of the September market close on the 29th, December gold had lost $75 for the month, and spot gold had fallen $70. 

Factors Affecting Gold This Month

DXY/CURRENCIES ACTION

The US dollar was one of (if not THE) biggest factors affecting the price of gold and other commodities in September. The greenback started the month at two-year lows, supporting gold prices as it made gold cheaper in foreign currencies. The big dollar rally in the third week of the month had the opposite effect. It was in large part responsible for the correction in gold.

CONTESTED US ELECTION?

Increasing doubts over the validity of the upcoming Presidential election could have global effects. Economists are warning about lasting damage to the safe haven properties of the US dollar and Treasuries if there is no clear winner in November.

Citi expects a crisis in the stock market, and both gold and the dollar tanking (the dollar much worse than gold). Gold is expected to rally quickly, especially if there is a recount situation like what happened in Florida in 2000. UBS is advising its clients to buy gold before the election, because it expects prices to spike.

COVID EPIDEMIC

Can you believe that it’s only been nine months since this all started? Europe is facing a new economic crisis, as the winter surge in COVID cases has already begun. Many EU nations are reinstituting targeted lockdowns in COVID hotspots. This new wave of infections is threatening the economic recovery in the EU. Prior to this, it seemed that Europe was recovering faster than the US from the epidemic.

Yelp says 60% of all US businesses that had to close due to the epidemic have permanently gone out of business. The National Restaurant Association says that more than 100,000 restaurants and bars have failed, throwing millions of people out of work, and causing nearly a quarter trillion dollars of losses.

CHINA LASHES OUT

Recovery from COVID lockdowns in China has been stymied by US trade sanctions. Recent moves by the Trump Administration to curtail Chinese spying and hacking has caused Chinese president Xi Jinping to lose face. Xi is eager to whip up nationalist sentiment among citizens, to take their mind off the faltering Chinese economy.

Incursions by the Chinese military into its disputed border with India have not gone as planned. The Indian army is holding strong against Chinese attempts to encroach across the ceasefire line, instead of giving way as Xi expected. To add a little spice to the mix, Russia has moved troops into the region, “just in case” things get bad. Russia and India have a long history of friendship

The Chinese have turned to an aggressive campaign to degrade the morale and military capabilities of Taiwan, which it considers a rebellious part of Communist China. Constant provocations across the Taiwanese Strait have caused an escalation of tensions in the region.

As a result, US arms sales to Taiwan have surged, as the Trump Administration assists Taiwan in modernizing and expanding its defensive capabilities.

All this is fueling safe haven demand in the region, including for gold.

SUPREME COURT FIGHT / (LACK OF) FISCAL STIMULUS

The deadlock between the Democratic House and Republican Senate over how much to spend on another economic stimulus package has been going on for months. Negotiations have been completely abandoned, as both sides gear up to fight over Trump’s nominee to replace the liberal Ruth Bader Ginsburg on the Supreme Court.

The GOP has the Senate votes to confirm the nominee, conservative judge Amy Coney Barrett, but the Democrats have vowed to do anything it takes to stop the vote until after the election. This means that any relief for US businesses and citizens is impossible until after Barrett’s confirmation. The stock market is not happy about this, of course. A new stimulus bill was ignored last month, because the economy was doing so well.

FED AND CENTRAL BANKS

The European Central Bank disappointed some market participants when it made no policy changes this month. There had been some hope that the ECB would try to weaken the euro or lower interest rates deeper into negative territory (which would have increased demand for gold.)

The Bank of England seriously spooked UK markets when their latest policy meeting revealed that they had talked about the implementation of negative interest rates. The central bank moved quickly to reassure markets that wasn’t being considered. Saying that negative interest rates have had mixed results elsewhere, the discussion in London was only over technical questions.

The Fed’s new policy is to ignore the inflation rate until it has been over 2% “for some time.” The goal is now to manage risks to the economic recovery. This means that the Fed feels free to pump up the economy until everyone who wants a job has one.

The Fed, however, is in the position where it can’t really do any more than it has done to boost the economy. It can’t reach the small; businesses and workers that need help the most. Boston Fed President Eric Rosengren says that unless Congress steps up, we will see more home and commercial foreclosures and business bankruptcies soon.

He mentions that community and regional banks are particularly vulnerable in this situation. If they fail, small and medium businesses will lose a vital source of funding. Rosengren said “I think the challenge is that we are very likely to face a credit crunch kind of issue as we get towards the end of the year.”

(DIGITAL) HELICOPTER MONEY FROM THE FED?  IS THAT LEGAL?

Speaking of Fed policy, chatter is increasing among Federal Reserve officials about the Fed inventing its own digital currency. Nicknamed “Digital Dollars”, this Central Bank Digital Currency (CBDC) could be sent directly from the Fed to the digital wallets of citizens. Since it would use a blockchain to track payments, fraud should be easier to detect and reverse.Depending on how you are able to “cash out”, they might be able to track what law-abiding citizens buy with it.

The big question is, does the Fed have the legal power to do that?

WILL COMMERCIAL MORTGAGE FAILURES CAUSE THE NEXT FINANCIAL CRISIS?

It isn’t just Fed president Rosengren that sees a growing crisis in commercial mortgage defaults. John Dizard at the Financial Times notes that the mortgages for stores, office buildings, shopping malls, hotels, and other commercial real estate has been “securitized,” rolled into Commercial Mortgage-Backed Securities.

The only reason that there hasn’t been large-scale defaults yet, is that companies are using maintenance cash accounts to pay principal and interest. That money ran out in September for many of those companies, which now face default.

Just like the foreclosures during the subprime lending crisis turned Mortgage-backed Securities into toxic loans and led to the Global Financial Crisis, these commercial mortgage-backed securities are set to crash financial markets and make a “Global Financial Crisis + COVID” crash.

Central Bank Gold Purchases

The data for central bank gold purchases for July were released this month. There were only two substantial moves in July. Uzbekistan sold 11.6 metric tons of gold from their reserves, and Turkey added 19.4 metric tons.

Other buyers were Qatar (3.1mt), India (2.8mt), and Kazakhstan (1.9mt). Sellers were Mongolia (-6.1 mt) and Russia,  Ethiopia, and Germany, which sold half a metric ton of gold, each. Totals were 27.2 mt purchased, and 19.2 mt sold.

Gold ETFs

The September 9th Gold ETF report from the World Gold Council showed that global gold ETFs continued to see net inflows in August, though the rate of growth had slowed.This is the ninth month in a row that gold ETFs have seen higher demand.

Globally, gold ETFs added 39 metric tons to holdings, worth $2.2 billion. This, as gold prices hit a new all-time high of $2,067 an ounce. Despite that, gold prices ended lower for the month for the first time in five months.

Also during August, stock markets hit new all-time highs of their own. Interest rates rose, and yield curves steepened, which brought real rates closer to nominal rates. Negative real rates increase gold demand, because it counteracts the fact the gold pays no yield.

NORTH AMERICA: North American gold ETFs once again led the rest of the world, seeing net inflows of 39 metric tons, worth $2.2bn.

ASIA: Gold demand from India and China recovered in August, as two new Chinese gold ETFs opened.The region saw net inflows of 8.9mt, worth $552mn.

EUROPE: An improving economic outlook and a drop in COVID cases across the EU led to a stronger euro and better risk on sentiment in Europe. European gold ETFs saw net outflows in August, mostly from German ETFs. Holdings of European gold ETFs fell by 11mt in August, worth $938mn

OTHER: The “Other” category saw inflows of 1.9mt, worth $108mn.

So far in 2020, gold ETFs have seen a record 938mt of inflows, worth $51.3 billion. The previous annual inflows record was 646mt, in 2009. Total gold holdings now total 3,824mt, worth $241 billion.

Since the beginning of this year, inflows amounted to 622.1 tonnes in North America, 278.6 tonnes in Europe, 36 tonnes in Asia and 20.7 tonnes in other regions. The largest holdings are in the US (1,984.7 tonnes), the UK (756.6), Germany (392.9) and Switzerland (363.5 tonnes).

On The Retail Front

Final August 2020 US Mint bullion sales continued pushing totals to fresh four-year highs. American Silver Eagle sales in August totaled 4,477,000 troy oz. American Gold Eagles sold 121,000 total ozt across all sizes, and the 24K American Gold Buffalo sold 28,000 ozt.

September US Mint sales, recorded through September 29th were 2,958,500 Silver Eagles, 22,000 oz of Gold Eagles, and 4,500 oz of Gold Buffalos. Note that US Mint bullion coins sales updates occur at irregular times. The Mint blames this on being short-handed on administrative employees, due to COVID work restrictions.

Retail gold demand in China and India remains weak, due to the massive loss of jobs as COVID locked down people in their homes. The months of isolation and joblessness have forced millions of families to sell their gold in order to make ends meet. Fortunately, the boom in gold EF investment in the West has more than offset poor sales in Asia.

The above-average monsoon season in India has jewelers looking forward to a rebound in gold demand this wedding season, as farmers will have more disposable income due to better harvests.

Market Buzz

September’s gold pullback has speculators and hedge funds abandoning bullish bets. Speculative longs are now near a 15-month low. Major banks have reduced their price forecasts accordingly.

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BANKS BEHAVING BADLY

JP Morgan has settled a 2015 civil lawsuit over manipulating precious metals markets. The three plaintiffs accused JP Morgan of causing them $30 million in losses by their manipulation. The Wall St. megabank is also in the process of finalizing a $920 million settlement in a criminal lawsuit brought by Federal regulators. This lawsuit covers JPMorgan not only manipulating gold, silver, platinum, and palladium, but Treasuries as well

A class action lawsuit over the same precious metals market manipulation by JP Morgan has been put on hold until next June, so that the racketeering trial against four JP Morgan precious metals traders can be concluded.

Two former Deutsche Bank precious metals traders were recently convicted of wire fraud for gold and silver price manipulation. Prosecutors accused them of “weaponizing” the futures market with their spoofing.

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Bloomberg Intelligence forecasts silver to outperform gold in the second half of the year. They believe that the next gold bull market is just starting. Using the gains of the 2008-2011 gold rally as a guide, they anticipate gold to hit $4,000 and ounce by the end of 2023.

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Venezuelan president Maduro’s bid to access £800 mn worth of gold stored in the Bank of England goes back to court. They are appealing a ruling that barred the BoE from handing over Venezuelan gold reserves held in its vaults. The UK, among many other nations, does not recognize Maduro as the legitimate government of Venezuela, after a rigged election in 2018.

In related news, rumors are circulating that Venezuela is paying for Iranian oil in gold. The top military advisor to the Supreme Ayatollah Ali Khamenei revealed that gold bullion had been transported by air from Venezuela to Iran in payment for recent shipments of oil from Iran.

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Citi is telling clients to buy the dip when it comes to gold. They predict a $2,200 high for gold in the fourth quarter.

Jim Rogers is also buying the dip. He warns of crazy debt levels among most governments. He says the next bear market will be “a very bad one,” and that things are going to be bad for the next decade.

Add Wells Fargo to the list of gold buyers. They say that the two-month sell off in gold through September is partly due to speculation, but more so due to the dollar.

On the other hand, Credit Suisse says the pain isn’t over yet if gold doesn’t regain its footing now. If gold loses the $1897 support level, the next stop is $1837 then $1765.

As mentioned above, UBS expects nothing good to come from the Presidential election, and is warning clients to buy gold now while it’s cheap.

Looking Ahead To Next Month

Expect more volatility in October, since the major factors driving gold prices aren’t going anywhere soon. The Presidential election will get even crazier in the home stretch, and have a greater effect on the stock market, the dollar, and gold prices.

This column is intended for educational purposes only. It is not intended as investment advice.