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 the price action of gold and examine the “what” and “why” behind those numbers.
What Did Gold Do in December?
Gold started December at $1,177 an ounce, a 10-month low. The Trump Rally in both stocks and the dollar showed no sign of slowing down, with precious metals and bonds taking a hit. Gold fell 1% after the far-right candidate’s loss in December 5th’s Presidential election in Austria eased safe haven demand in Europe.
The Fed finally stepped up to the plate on the 14th and raised the Fed funds interest rate by a quarter-point. This gave more fuel to the rallies in the dollar and the stock market. Things improved near the end of the month, when gold hit two-week highs the last few days of the year. At press time, gold was showing a 8.5% gain for the year, while silver notched nearly twice the gains, at 16%.
Factors Affecting Gold This Month
TRUMP RALLY ON WALL ST
Stocks continued to rally in December, pushing toward new records. The financial sector has gained the most from the expected actions of the incoming administration. Trump has promised to repeal banking regulations, such as Dodd-Frank, put in place after the global financial crisis. His plans for massive infrastructure projects will involve massive deficit spending, which will cause higher inflation. Higher inflation helps banks increase profits as the rates between borrowing and saving widens.
Energy sectors, such as oil drilling and coal mining, have also risen to new highs based on Trump’s promises. They are expecting the abolishment of many EPA rules, which will reduce expenses. Also, Trump has promised to allow drilling on all Federal land and to bring jobs back to the coal mining industry.
The defense sector is seeing their stocks rise in general, except for companies like Lockheed Martin, that saw its stock price tumble after Trump tweeted about the massive cost overruns of the next-generation F-35 jet fighter. Even before the inauguration, Trump is shaping policy through Twitter and public statements, especially to pressure companies over cost overruns on government projects.
All that projected spending will mean more well-paying jobs in construction and industry. Add to this the promised tax cuts, and common people across America will have extra money to spend. This scenario is lifting stock prices for consumer goods and entertainment companies.
THE DOLLAR STANDS ALONE
While predictions of higher inflation should make the dollar fall, an improving U.S. economy versus economic slowdowns in the rest of the world has lifted the dollar to 14-year highs. This has pulled down the prices of commodities traded in dollars (which is nearly all of them). As each dollar is worth more, it takes fewer of them to buy commodities on the global market.
TOUGH TIMES FOR SAFE HAVENS
Of course the enthusiastic response to Trump’s “Make America Great Again” plans have tossed safe havens to the curb. Bonds have seen some of their worst losses in years, while gold has fallen from a 2016 high of $1,378 an ounce in July to $1,130 in mid-December.
However, both sectors reached oversold conditions by late December. At the same time, the huge rallies in the dollar and stocks was running out of steam. This was a matter of “too far, too fast” but in opposite directions.
As the dollar eased lower and stock prices trended down, both bonds and gold gained. Part of this is also attributable to the account-squaring that always happens the last week of December. Gold ended 2016 at $1,160 an ounce, about $100 higher from the start of the year.
On the Retail Front
On December 9th, the U.S. Mint announced that it had sold out of 2016 Silver Eagles, as well as 1oz, 1/4oz, and 1/10oz Gold Eagles. The last time the U.S. Mint sold as many gold coins as it did this year, gold was $1,900 an ounce. Combined sales of American Gold Buffalo and American Gold Eagles of all sizes totaled more than 1.2 million troy ounces in 2016. The last year that U.S. gold coin sales exceed this number was in 2011, when 1.6 million ounces were sold.
The 37.7 million 2016 Silver Eagles sold was 9.3 million less than the record 47 million sold in 2015. Silver Eagles missed setting a new record in 2016, due to lagging demand last summer. Part of the reason for that lagging demand in the middle of the year was from substantial action in the secondary market. Silver stackers cashed in their Silver Eagles as prices hit a two-year high, selling hundreds of thousands of them to dealers. This led to smaller Silver Eagle orders from dealers with the U.S. Mint throughout the summer.
China’s central bank surprisingly made no major gold purchases in November, though the Russian central bank bought another 34 metric tons (approximately 1 million troy ounces). The World Gold Council updated its data on central bank gold reserves on December 8th. Not counting the IMF, Russia is in 6th place in national gold reserves, while China is in 5th place.
It is notable that China’a 1,842 tonnes of gold only makes up 2.3% of its total reserves. This compares to the United States’ 8,133.5 tonnes, which makes up 75.3% of total reserves. This means that China’s gold reserves are only 22% of U.S. gold reserves, by weight. Of course, this is using China’s official numbers, which anyone who seriously follows the gold market believes is far below its actual holdings.
Speaking of China’s real level of gold demand, Asian gold expert Koos Jansen lays out how Thomson Reuters GFMS is allegedly misrepresenting Chinese gold demand to its own advantage.
This month, we have fresh evidence that the “conspiracy theory” of gold manipulation is actually fact: German megabank Deutsche Bank settled a class-action lawsuit charging them with gold manipulation for $60 million. The suit was brought by investors who said that Deutsche Bank’s manipulation of the gold market caused direct harm to private investors and even DB’s own clients. As part of a settlement of an earlier silver manipulation lawsuit, Deutsche Bank agreed to hand over internal communications to the plaintiffs. This included online chat records between their traders and the traders at other banks. These records were made public in December, implicating nearly every Too Big To Fail bank. Called the “Manipulation Smoking Gun,” the data includes chat logs of Deutsche Bank silver traders conspiring in real time with employees of UBS and other big banks to break the market. They would agree on whether to buy or sell and at what price. Then they would countdown in the chat room and execute their orders all at once. In one instance, a UBS trader tells his counterpart at Deutsche Bank “If we are correct and do it together, we screw other people harder.”
On the subject of gold manipulation, the Shanghai Gold Exchange announced that the maximum transaction size on the exchange would be cut in half, beginning January 1st. The largest amount of orders that can be placed at one time will be 500kg (16,075 troy oz), instead of 1000kg (32,150 troy oz). This was done to slow down attempts to “flash crash” the market in order to make illegal profits. This won’t stop market dumps, but it will slow them down, giving other traders time to react. This will mean that it will take more gold sold over a longer period to approach the desired results. Of course, 500kg of gold is still over $20 million of gold that can be bought or sold in one transaction.
The Shanghai Gold Exchange continues to grow. 3.4 million kg (109.3 million troy oz) of gold changed hands on the SGE in November, the most in a year. The Chinese government wants to shift the center of power for the global gold market from London to Shanghai.
We could be approaching Peak (Mined) Gold, as these charts from Bloomberg show. It seems that all the easy to reach gold in the world has already been found. This means less new supply coming to market each year, which will raise prices. These higher prices will be needed to make exploiting smaller, more remote gold deposits profitable.
Maybe the higher prices we’ve seen for gold in the last week of December are from people heeding the advice of famous economic adviser Mohamed El-Erian. He says it’s time for investors to take profits on this huge Trump Rally and reduce their risk. While El-Erian is holding 30% of his total investments in cash, we of course like the bargain prices of gold lately.
Peter Schiff is of similar mind, saying that when interest rates start rising, the stock markets are going to give back the gains from the Trump Rally. He says we’re already seeing home sales slow down as mortgage rates climb.
James Rickards isn’t too bullish on the market going forward, either. He predicts a major recession soon, perhaps as early as 2018, and Trump won’t be able to stop it because the banking lobby won’t allow the necessary reforms.
Rickards says that giant investment banks, like Goldman Sachs and JP Morgan, need to be broken up and the types of derivatives that destroyed the market in 2008 be outlawed. He doesn’t think that Trump can win a fight against the banking lobby, since so many Federal banking regulators are former executives from those same Wall St banks. Large amounts of banking lobbyist cash also flows around in Congress, giving the financial sector allies there as well.
The evils of civil forfeiture (how has this not been knocked down as unconstitutional?) has spread to Europe. Border police will soon be able to declare travelers a “suspicious person” and seize all the cash and/or gold they are carrying. Of course, this is to “fight terrorism”.
This article at Casey Research gives a rundown on all the ways the Federal government is stepping up its war on gold.
Last month, International Man talked about the advantages of getting a second passport, in addition to your U.S. one. This month, he warns about passport scams and what to look out for.
In the “So Crazy It Might Just Work” department, the President of Peru wants to mine the nation’s largest aquifer for gold. The river that flows into the aquifer begins in the gold fields in the mountains. He says the aquifer needs to be dredged anyway and the resulting silt is estimated to hold more gold dust per ton than the gold concentration in ore at the nation’s largest gold mine. (The cities that rely on the aquifer for drinking water aren’t sold on the idea.)
Considering how the economy in 2016 has ended exactly opposite of how it began, any predictions for the new year would be difficult. A few things are pretty certain though. The European Union will be stretched to the breaking point as populist, anti-corruption political parties win majorities in France, Italy, and the Netherlands.
President Trump will likely have a hard time getting the Republican Congress on board for all of his infrastructure plans, though he will likely get some of it passed. His plans to beef up America’s military will get a warmer reception.
A sticking point will be getting deficit hawks in the House to agree to bust the budget to pay for these stimulus measures. Increased deficit spending will raise inflation, making the nation’s debt a lot harder to service.
Interest rates will also see upward pressure from the Federal Reserve, if it actually follows through on plans to raise interest rates three times next year. Since there are only four FOMC meetings per year that include a press conference by Janet Yellen, any rate hikes will likely be on March, June, September, or December.
Speaking of the Fed, there is more than one person on Trump’s economic advisory team that would like to see the Fed abolished completely. There is support in Congress for this measure as well. Rumors are already circulating that Yellen may be forced out as Fed Chairman before her term expires in February 2018.
This month, we close with the story of a beautiful gold ring dating back to the time of Robin Hood which was actually found this month in Sherwood Forest.