February 2020 in Precious Metals, by Steven Cochran

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. – Steven Cochran, of Gainesville Coins

Gold In 2019: A Review

Before we get into gold’s wild ride in February, let’s take a look at it’s performance last year. (Data for this review was supplied by the World Gold Council.)

Overall global gold demand was down 1% in 2019, to 4,355.7 metric tonnes (4,801.3 US tons). Higher prices slowed physical gold demand, but this was more than offset by a huge surge in physical gold-backed ETFs. Gold-backed ETFs added 401 tonnes (442 tons) in 2019. This was 426% higher than in 2018.

Central banks bought 650.3 metric tonnes (716.8 tons) of gold in 2019, the second-highest total since 1967. 2018 was the highest, at 656.2 t. Fifteen central banks bought at least 1 tonne of gold last year.

Retail gold demand in 2019 fell 11% due to higher prices. Gold rose in nominal terms against a stronger US dollar. A stronger dollar hurts gold demand in other countries, because it becomes even more expensive in their own currencies. This led to gold prices rising in every nation on Earth. Several countries saw all-time high gold prices in their currency in 2019, due to this currency weakness.

Higher gold prices meant that more old gold was sent to the scrappers last year — a total of 1,304 tonnes. This 11% growth in gold recycling helped the global gold supply rise 2% in 2019, to 4,776.1 tonnes.

This was a good thing, as global gold mining production fell 1% to 3,463.7 tonnes. This is the first annual drop in global gold production since the Financial Crisis in 2008.

China’s domestic gold mining (all of which remains in the country) has now fallen 3 years in a row. It would seem that they are on the downside of “peak gold” in their mining sector. This means that China has to rely more on gold imports to fill demand.

Russia and Australia are still increasing production, but how long they can keep their gold sectors expanding remains to be seen.

Gold So Far in 2020

Spot gold started 2020 at $1,516.80 an ounce. It gained $71.70 in January. As of the close of the spot market on February 27, gold had gained another $56.10.

Gold futures started the year at $1,523.10. It added $64.80 in January, and gained $54.60 by the February 27th close.

What Did Gold Do in February?

Gold started February with a $35.80 loss over the first two days of the month. This crushed prices from $1,588 to a monthly low of $1,552. Prices had worked their way back to $1,583 by Valentine’s Day.

It was when the markets came back from Presidents Day that the afterburners were lit under the gold market. Spot gold gained $20.40 on the 18th, closing at a seven year high of $1,601.20. This was the first time gold had broken the psychologically important $1,600 mark since March 27, 2013

Gold soon left this mark in the dust. Spot gold ended the holiday-shortened week at $1643.00, a weekly gain of $62.20. This was the best week for gold in six months.

Before the world went into panic mode for the last week of the month, we were seeing gold hit successive seven-year highs in dollar terms, and a long string of all-time highs in several currencies. At the same time stocks were making several all-time highs of their own, and demand for Treasury bonds was strong.

Monday the 24th saw world stock markets finally panic as the Wuhan coronavirus broke containment. The virus began spreading from the regional epicenters of Iran and Italy to infect neighboring countries. South Korea saw an explosion of new cases on the same day.

The Dow closed down more than 1,000 points for the third-worst point drop in history. Investors’ shock was amplified by the fact that stocks had ignored the economic threat of the epidemic until this point. Globally, stocks saw $1.7 trillion of value wiped out in a single trading session. Panicked investors trying to sell found online brokerage systems either bogged down or completely broken.

As stocks crashed, billions of dollars surged into safe haven assets. Gold surged more than $40 an ounce to hit a high of $1,685 before closing at $1,659.40 (spot) and $1,676.60 (futures).

Tuesday the 25th saw gold give back Monday’s gains. This was a combination of profit-taking, and desperate investors selling anything they could to meet their margin calls caused by the bloodbath in equities the previous day. Gold is a popular hedge against equity loss, because it’s highly liquid, and usually in high demand during stock market stress.

Severe stock market losses continued into the end of the month, resulting in the worst week for Wall St. since 2008. Thursday the 27th saw the Dow suffer its greatest single day point loss in history. Gold trended between $1,650 and $1,640 until Friday, when more heavy selling to cover margin calls on the stock market sent it crashing to $1,562 an ounce before recovering.

All metals were hit just as hard. Gold and silver were hit due to expectations that the hundreds of millions of people forced to miss work or were quarantined won’t have any money to spend on jewelry or consumer electronics. Platinum group metals and base metals were hit due to the sudden economic slowdown and supply disruptions caused by the epidemic.

Gold This Month (Besides Coronavirus)

 

Irrational Exuberance In Stocks

Stocks continued to hit all-time highs in February, but this was on the backs of fewer and fewer giant companies. This is basically the textbook version of the superheated trading that happens before a crash. While the immediate trigger was the coronavirus epidemic, Wall St. was due for some pain, regardless.

The VIX stock volatility gauge, also known as “the Fear Index,” started the month at 23.92, which was high compared to past months. On the day after the huge stock selloff on the 24th, the VIX rose to 30. The next day, it rose past 31. The day after that, it broke through the 47 level.

 

Wall St. Demands The Fed Save Them (Again)

Over the course of the last week of February, analysts and even CEOs clamored for immediate rate cuts by the Fed. First, the market priced in two rate cuts for the year, then three, and now four.

Current and former Fed officials made the financial press circuit, trying to dampen the panic. Even Chicago Fed president Charles Evans, who never met a rate cut he didn’t like, said that right now, it is too soon to think about an emergency rate cut.

The common message was that the Fed needed to gauge the economic affects of the coronavirus before acting. The subtext of the message was that the Fed has stopped thinking that the stock market and the economy are the same thing.

At least one major financial executive agrees with the Fed. Padhraic Garvey responded to the clamor of his contemporaries for a market cut ASAP by remarking that an interest rate cut never cured anyone’s flu. Tom Porcelli, chief US economist at RBC Capital Markets, agrees: “What do rate cuts at the front-end do exactly to shift the trajectory of the core short-term problems stemming from COVID-19? It boggles the mind.”

Bond Mania

Yields on the 10-year and 30-year Treasury notes hit successive all-time lows in February, on bets of the Fed cutting interest rates and resuming Quantitative Easing to deal with the economic fallout from the Wuhan pandemic.

When February began, bond markets were concerned about how low Treasury yields had fallen. The 2-year T-note was yielding 1.36%, the 10-year was at 1.54%, and the 30-year long bond was at 2.01%.

On the last trading day of the month, the 2-year was at 0.90%, the 10-year at 1.14%, and the 30-year at 1.66%. This has pushed real interest rates to the deepest negative reading in years.

Part of this is fund managers and large investors having nowhere else to keep the trillions of dollars of cash that was pulled out of the stock market in late February, and part of it is locking in yields before the Fed cuts benchmark interest rates.

On The Retail Front

The World Gold Council reported that global gold-backed ETFs and similar products added 61.7 tonnes(t), or net inflows of US$3.1 billion, in January. This boosted holdings to new, all-time highs of 2,947.1t Combined with a gold price increase of nearly 5%, assets under management (AUM) grew 8% in US dollars during the month.

The Perth Mint announced that holdings of their “government gold”-backed ETF, PMGOLD, hit a new all-time high of 137,730.86 ounces (4.28 tonnes) in January 2020, with inflows beyond 3,500 ounces for the month.

(Just a reminder: Owning shares of a physical gold-backed ETF does *not* give you any claim whatsoever to real gold.)

In a curious twist, the US Mint has not updated bullion coin sales figures at all in February. When asked why, a Mint spokesman said that the guy who handled that decided to quit. Make of that what you will.

Market Buzz

Federal regulators are preparing to charge JP Morgan with precious metals manipulation. The Feds have already arrested six JP Morgan precious metals traders, and this new investigation comes from those prosecutions.

In an eye-opening move, these six traders are being charged with racketeering under the RICO Act. The RICO Act was passed as a way to prosecute the Mafia.

Speaking of TBTF banks, Goldman Sachs says that if the Wuhan pandemic isn’t brought under control soon, gold could hit $1,850 an ounce.

After blowing past his 2020 prediction of $1,625, Ole Hanson at Saxo says that gold is in a “perfect storm” (the good kind). He shows how gold has hit new record highs in ten of the world’s top 16 currencies.

Lawrie Williams at Sharps Pixley ponders whether Russia’s reduction in gold purchases means that it has achieved freedom from dollar hegemony, and can now start exporting its domestic gold output

That gold buying spree that Poland went on over the last two years is paying dividends, with the market value of the nation’s gold reserves rising from $5 billion to $6 billion so far this year.

Richard Teitelbaum at the Institutional Investor uses data from Freedom of Information Act requests to try and answer the question “Who Owns the New York Fed?

He found that out of the more than 70 banks that own shares of the NY Fed, Citibank and JP Morgan control 72% of the stock. While shareholders don’t actually get to vote on policy at the NY Fed, they DO get to vote on new board members. It’s interesting that there is never more than one person to vote for to fill any vacancies. Are Citibank and JP Morgan controlling things behind the scenes to make sure only the people they want are nominated?




6 Comments

  1. Steven, any word on who dropped the approx. 3billion in shorts to kill the momentum in golds rise? When are we going to get transparentcy to such blatant manipulation?

    1. Hi VT,
      It was probably some big players to start off, then the algos jumped on board. Anybody who had active puts on gold would have been closing those out like their hair was on fire.

      It does make you wonder how they all manage to always do it at once every time. Definitely some chatter between some trading desks, or even High Frequency Trading algos that watch each other for a signal. These short dumps would basically all happen in one second in that case.

      With the precious metals manipulation probes going on in multiple nations, hopefully we will see this being suppressed some time in the future. The DoJ going after JP Morgan itself instead of stopping at the traders, is a good sign.

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