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 February?
The precious metal markets were robust during February, with strong retail and investment demand driving gold and silver to nearly four-month highs. Platinum and palladium continued the rally that has placed them as the #4 and #1 (respectively) best-performing futures contracts year-to-date. Over the last year, palladium prices have rebounded from a five-year low to jump over 60%.
Silver came in at #2 in the rankings, up 13% so far in 2017, with gold (+8%) also cracking the Top 10. While the Platinum Group Metals have outpaced their precious metal cousins, the gold rally has held steady in the face of a relatively strong U.S. dollar, making the surge that much more impressive.
Factors Affecting Gold This Month
Safe Haven Demand In Europe
Much of the global attention has centered on Europe as the populist wave sweeping across the continent’s politics erodes confidence in the European Union’s future. In addition to elections in The Netherlands and Italy, the focus of this movement is now set to play out in France’s presidential contest.
The nationalist party Front National (National Front) is now widely expected to be represented in the final round of the national vote by party leader Marine Le Pen. The daughter of the party’s founder, Le Pen has as consistent record of espousing curbs on immigration, traditional notions of French identity, and a return of sovereignty from the EU in Brussels. In addition to gaining in the polls, Le Pen has garnered attention for proposing to return France to a national currency– perhaps a “new franc”.
If Le Pen is elected and indeed negotiates a “Frexit,” pulling France out of the eurozone, this blow to the common currency would be an even more seismic shift than Britain’s exit from the EU political union. France is continental Europe’s second-largest economy behind Germany. As anxiety over the French election seeps into the financial markets, the spread between France’s 10-year bond and the German 10-year Bund has grown to its widest margin in over four years.
Speaking of Brexit, new Prime Minister Theresa May’s comments about a “clean break” from Europe have reignited calls for an independence referendum in Scotland. In 2014, the Scots voted by a 55% to 45% margin to remain a part of the United Kingdom. However, with most Scottish voters preferring to remain economically linked to the EU, holding another plebiscite may fracture the union between England (and Wales) and Scotland that has existed since 1707.
In other news from the U.K., Switzerland imported over 84 tonnes of gold from the country in January. This is surprising, breaking the trend of gold being imported into London’s vaults when prices are rising.
Elsewhere in Europe, protests broke out in Romania after the public became dissatisfied with promises that the government would rescind a recent decree by the premier that decriminalizes certain offenses categorized as corruption. The protesters in the streets numbered as high as 500,000.
Socialist Nightmare In Venezuela
The cash-strapped socialist dystopia continues to descend into chaos in Venezuela as it comes to light that the state-run oil giant, PDVSA, is months behind on crude oil and fuel shipments to China and Russia. These countries have oil-for-loan arrangements with the Venezuelan regime, which is teetering on the brink of collapse. Hyperinflation and a chronic lack of basic necessities has left much of the population without adequate food. The crumbling socialist economy has been extended a $55-billion credit line by Russia and China combined.
Those who can are grabbing U.S. dollars or gold to preserve what tiny sliver of purchasing power they have left.
Devaluation In Turkey
In Turkey, investors and everyday bank account holders are piling into gold deposit accounts amid a crash in the value of the lira, the national currency. After fending off a supposed military coup last year, President Erdoğan has encouraged people to convert any savings in foreign currencies into gold or lira to support the currency’s value. Turkey actually produces more gold bullion coins on average each year than any other state mint, though these coins are almost all purchased domestically.
The Turkish economy has plunged as a result of Erdoğan’s consolidation of power, which has given him dictatorial powers. Much like the Venezuelans, Turks are converting their cash to euro or gold, since the lira has become one of the most-devalued currencies among developed nations.
Tensions with the rogue state in North Korea have been on the rise after reports that Kim Jong Un’s regime carried out a number of political assassinations, including the killing of the Supreme Leader’s half-brother in Malaysia. The assassination was supposedly accomplished with a toxic nerve agent known as VX. Discussions between officials from the U.S. and China about reining in the North Korean dictator have predictably stalled.
Trump’s Forceful Foreign Policy
One of President Trump’s earliest foreign policy moves was to slap more sanctions on Iran. The move comes as the ayatollahs violate the spirit, if not the letter, of the recent nuclear arms treaty.
The U.S. Treasury Department published a list of 13 individuals and 12 entities facing new restrictions, citing some for contributing to Iran’s ballistic missile program and others for links to terrorism (25 total).
In addition to pulling the U.S. out of the Trans-Pacific Partnership (which was basically written by multinationals to put their interests above America’s), Trump has backed up his tough talk on trade with direct verbal confrontations with leaders in Mexico and Australia. Whatever one’s opinion of President Trump, there’s no denying that the upheaval his agenda is causing in the financial and economic establishment is welcome (and a great reason to buy gold).
On the Retail Front
Central Bank Gold Reserves
On February 2nd, the data on central bank official gold holdings for December 2016 was released. Little Kazakhstan continues to buy gold to bolster its currency, adding another 3.36 metric tons. That extends the monthly gold buying streak by the Kazakh government to 51 months!
Other buyers included Belarus (5.52 mt), Mongolia (0.77 mt), and Malaysia (0.31 mt). Usual suspects, China and Russia, were both absent from the gold reserves market to end the year. China is shoveling money into the forex markets by the billions, trying to arrest the slide of the yuan.
Speaking of having a fire sale in an attempt to stop a currency crash, Turkey continued selling gold at a frantic pace to prop up the lira. (It isn’t working.) Another 19.41 metric tons of gold left Ankara in December. The Turkish government sold 97.35 metric tons of its gold reserves, just in the last six months of 2016.
In a case of the government trying to hide true silver demand, it seems that the Philadelphia Mint has been minting American Silver Eagles since 2015 to keep up with orders. It was known that the San Francisco Mint helps the West Point Mint with ASE production, but the fact that Philadelphia was also minting Silver Eagles was disguised by the U.S. Mint replacing the straps on the 500-coin “monster boxes”. Before, the straps said “West Point” or “San Francisco.” Now, they simply say “U.S. Mint.”
In other U.S. Mint news, it’s time to contact your Representative and tell them to co-sponsor the Purple Heart Commemorative Coin bill to honor those who have shed their own blood in the defense of the nation.
In related news, February 27th saw the 17th annual “Melting Of The Rings” ritual by U.S. Military Academy alumni. Retired Army officers, or their heirs, donate their West Point class rings to be melted down and used to make the Class of 2018 rings for graduating cadets. In this way, the spirit and devotion of the U.S. Army is passed on to the new generation. One of this year’s rings is that of General James M. Gavin, commanding general of the 82nd Airborne in World War II.
Across the Atlantic, Britain’s Royal Mint is seeing gold coins and bars flying out the door. Demand is up by 50% from this time last year. It seems Brexit + Trump = gold rush in the U.K.
On the other side of the world, the party isn’t slowing down at all at Australia’s Perth Mint. The mint recently reported that bullion sales for the 2015-2016 fiscal year that ended June 30 more than tripled.
In a totally different vein, the Dutch have sold their Mint. The government of the Netherlands has completely exited the business of making the nation’s circulating and commemorative coins, selling the Royal Dutch Mint to a Belgian company.
German Gold Repatriation In Overdrive
Regarding all the worries in the EU about Grexit, Brexit, and Frexit, not to mention that the euro may fail, Germany’s central bank is accelerating repatriation of the nation’s gold. Instead of taking until 2020 to bring the majority of German gold home, the Bundesbank plans to have it all repatriated by the end of this year.
World Gold Council Report
The most recent research released by the World Gold Council (WGC) reinforced the narrative of gold’s resilience in the face of a stronger dollar. Despite an enthusiastic stock market rally following the election of Donald Trump, and an end-of-the-year interest-rate hike by the Federal Reserve that drove some demand away from the gold market in a typical winter swoon, the same forces that supported gold and silver’s 2016 performance are firmly in place thus far in 2017.
According to the WGC, annual global demand for gold rose 2% in 2016, with the highest total tonnage (4,308.7) in three years. Over 1,000 tonnes of this total was made up by physical demand for coins and bars, which stalled somewhat during the third quarter in part because of a number of surprise measures by India’s government dampened seasonal gold purchases from the world’s largest consumer. Lower prices during the fourth quarter led gold sales to close on a strong note nonetheless. By February, gold prices in India have rebounded amid the traditional wedding season, while demand for silver from jewelers and other industries are raising regional premiums on the argent metal.
WGC data also showed that investment demand for gold was a whopping 70% higher year-on-year in 2016, climbing to its highest level in four years. Gold-backed exchange-traded funds (ETFs) saw the second-highest inflows on record, 531.9 “tonnes” of gold purchased (on paper, of course). This helped make up for sluggish gold jewelry sales and central bank purchases in 2016. At this point, Russia’s central bank is among the only monetary authorities that consistently adds gold to its reserves.
Paul Mladjenovic, the author of “Precious Metals Investing for Dummies,” went on the record in mid-February insisting that 2017 “will be a great year for precious metals”. Though the immediate post-election reaction of the markets to dump gold caught Mladjenovic off-guard, he believes the yellow metal isn’t done climbing yet this year.
For reasons of supply and demand (or, one could say, the disconnect between the two), the SRS Rocco Report pinpoints why the next major correction in the markets could send global gold demand through the roof.
As for the companies that mine the metal, the Canadian firm Klondex has captured the attention of investors with its uncommon talent for transforming unproductive mining projects into profitable operations.
Peter Schiff talks about “The Three Reasons Gold is Rising and the Dollar is Falling”. Basically, it’s 1) the establishment’s worry over Trump’s policies; 2) interest rate hikes by the Fed won’t be enough to keep up with inflation, making bond yields lower than inflation; and 3) the effects this growing inflation will have on the dollar.
Hedge fund superstar Stanley Druckenmiller is bullish on gold, after reaping big gains in the first half of 2016, then getting out right before gold weakened after the presidential election. Now, he’s back into gold in a big way, ready to ride the next wave up.
In the little ex-Soviet republic of Kyrgyzstan, the government wants every citizen to buy gold as an inflation hedge and preserver of wealth. In the last two years, the government has sold 140 kilograms of gold to its people. Kyrgyzstan has been one of the most progressive ex-Soviet nations, when it comes to an open currency.
Looking ahead, we wonder: will the Fed raise interest rates in March? Will it make any difference if they do?
We’re also watching fiscal policy out of the Trump White House. If we get some details on Trump’s proposed infrastructure program, it could move inflation expectations and help gold prices. There’s a chance that the price tag to “Make America Great Again” will be too high for Tea Party and “small government” Congressmen to allow. The whole Sequestration law passed to get the nation’s deficit under control will have to be amended or scrapped.
To wrap up this month, we have the story of another gang of clever thieves, this time in Britain. Their “heist movie”-style robbery went off without a hitch, until a nosy old neighborhood lady called the law over strange happenings.