Guest Article: May In Precious Metals, by Steven Cochran

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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 take an in-depth look at the “what” and “why” behind the price movements of gold and silver.

Precious Metals Market Drivers in May 2014

After trading in a tight range for more than two months on either side of $1,300 an ounce, gold broke down through key technical levels on the 27th. Reports of a single sale of $450 million in gold pushed prices down $13.00 an ounce through technical support, and triggered sell stops, which pushed prices lower.

GOLD PRICE MANIPULATION: The Smoking Gun

There was big news on the gold manipulation front! Barclays Bank was fined $44 MILLION over manipulating gold prices in what is the first documented, among many undocumented, instances of price rigging on the London Gold Fix. On June 28, 2012, a director of precious metals trading at Barclays made massive fake sales of gold, during the afternoon gold fix, to push the price below $1,588, in order to avoid making a $3.9 million payment to a client. The client smelled a rat and contacted Barclays management. The trader lied to his bosses, and then he lied to investigators from the Financial Conduct Authority. Barclays paid the client the $3.9 million and then fired the trader, who has been banned from the financial industry for life.

Because Barclays immediately went to the authorities when it found out about the manipulation and cooperated with authorities, it was only fined $44 million, BUT, there are some smoking guns still lying around: One, the trader had emailed “friends” working precious metals trading desks at other banks asking for help in pushing the afternoon gold fix down, and the head of precious metals trading at Barclays Bank suddenly resigned three days before this crime came to light.

In more manipulation news, Deutsche Bank has abandoned its seat on the London Gold Fix, because it could not find a buyer. All those giant banks that passed on the offer are probably thankful, since the Barclays conviction gives all the class action lawsuits over gold manipulation a smoking gun.

In related news, the London Silver Fix will be shutting down following an announcement made by the three major banks that run the operation. Since 1897, the benchmark price of silver has been set by a conference between three of the largest bullion banks in the world. With Deutsche Bank leaving, there was only HSBC and the Bank of Nova Scotia left, and that was deemed too few to set the daily price. An official statement from The London Silver Market Fixing Ltd. announced that the group will stop administering the fixing on Aug. 14, 2014.

CENTRAL BANK GOLD AGREEMENTS

Europe’s largest central banks renewed an agreement not to sell “significant” holdings of the precious metal for another five years. In a joint statement, the signatories to the Central Bank Gold Agreement said they “will continue to co-ordinate their gold transactions so as to avoid market disturbances” and pledged that “they do not have any plans to sell significant amounts of gold“.

Gold market watchers were quick to notice that the hard limit of selling no more than 400 tonnes a year has been removed, replaced by the mealy-mouthed quote above.

CIVIL WAR IN UKRAINE

Pro-Russian separatists in eastern Ukraine held a snap referendum on May 11th, despite discouragement from Russian president Vladimir Putin, and proclaimed their independence. Rebels have in large part squandered the initial goodwill they had among the people of eastern Ukraine, by demanding “taxes” from businesses and the wealthy and seizing control of local governments.

On the 25th, national elections for Ukrainian president were held. Moderate candidate and billionaire businessman Petro Poroshenko won. Poroshenko, called “The Chocolate King” due to his candy empire, has pledged to work with both Russia and the West to keep Ukraine independent from both.

He also promptly launched a successful military offensive in eastern Ukraine, recovering some rebel-held areas. Russia did not actively intervene, to the dismay of the rebels, but did offer humanitarian aid.

Putin’s decision not to enter into open warfare in Ukraine was cited as a large reason for the “risk on” atmosphere in Western markets that removed safe haven support for gold in the last week of May.

CHINA AND RUSSIA

China and Russia finally hammered out a deal 15 years in the making, where Russia would sell Siberian natural gas to China. The price agreed to was not made public, sparking speculation that the Chinese had used their position of strength to force Putin to agree to a discount. Putin is very concerned over the EU’s new push to wean itself off Russian energy, since petroleum and natural gas exports are a major part of the Russian economy

Shipments are expected to begin in two years, and transactions are to be made in ruble and yuan, bypassing the dollar. Both the Chinese premier Xi and Putin stressed the need to exclude the U.S. dollar from as much international trade as possible. At the same meeting, Putin declared that Russia and China need to make sure that their gold and currency reserves are secure.

The president of Iran was in Beijing at the same time as Putin. After the gas deal was announced, China, Russia, and Iran signed an agreement to cooperate more closely in international affairs.

EU ELECTIONS/ECB POLICY

Elections for the EU European Parliament were held this month, giving a wake-up call to the status quo. The right-wing populist UK Independence Party (UKIP) won 27% of the vote in Britain, gaining ten seats in the European Parliament. The UKIP is a British version of the Tea Party, except that it is a party separate from any other. In France, Le Pen’s National Front won first place, getting 18 seats in the EU Parliament. Many of these Euroskeptic parties want to abolish the euro and return to their own national currencies. The ruling parties in Germany and Italy fended off similar threats in their own elections.

The election results, while not as dramatic as some had expected, put any new sovereign bailouts in doubt and weakened the euro to a four-month low. A weak euro means a strong dollar, which means lower gold prices (for now).

On The Retail Front

The Royal Canadian Mint has released their final sales figures for 2013, and report that both the Gold and Silver Maple Leaf bullion coin sales set new records. Gold Maple Leaf sales were up 47.7% to 1.14 million troy ounces, and Silver Maple Leaf sales were up 55.8% to 28.2 million troy ounces. 2014 looks to be another banner year for the historic bullion coins. Interest for the 2014 Silver Maple Leaf is even higher this year, with the introduction of the same micro-etched security mark as the Gold Maple, and a new field of precise radial lines that give a shimmering effect when viewed at an angle.

The 2014 American Silver Eagle bullion coin is on track for another all-time record, with 21.3 million sold through the third week of May.

Market Buzz

Peter Schiffsays the goal of gold manipulation is to prop up the U.S. dollar, not to kill the gold market: “If you’re skeptical of big banks and big government, gold manipulation shouldn’t put you off investing in sound money. Instead, consider it as you would a gift horse. Instead of looking it thoroughly in the mouth, smile and graciously accept your good fortune.”

Russia increased gold production by 8% last year, to overtake the United States as the world’s #3 gold producer. U.S. gold production slipped 2%, but even had it remained at 2012 levels, Russia would still have taken away the #3 spot.

Schiff also looks at the bewildering case of someone in Belgium buying trillions of dollars in U.S. debt and wonders, is the ECB bailing the Fed out after the Fed Helped with Euro Crisis? “Since August of 2013 entities in Belgium have purchased and held a stunning $215 billion of U.S. Treasuries. This figure is equivalent to about half the country’s annual GDP, and equates to almost $20,000 for every living Belgian.”

According to reports, the People’s Bank of China has given the Shanghai Gold Exchange permission to build an international gold-trading platform in Shanghai. The exchange has already contacted foreign banks, including HSBC, ANZ, Standard Bank, Standard Chartered Bank, and the Bank of Nova Scotia, and invited them to participate in a new international board. This is on top of plans announced earlier to offer a gold contract denominated in yuan.

James Rickards is warning of a massive financial collapse that will leave people scrambling for gold and no one willing to sell at any price. He says that it may all start with China, and start sooner than even he thought: “Now, over to China, this is one of the things that is happening faster than I originally thought. The credit collapse story is happening in real time… Defaults are piling up. We are seeing money rise. We’re seeing people march down to the banks . . . trying to get their money back. . . . So, if they can’t buy foreign stocks, domestic stocks, don’t want to put their money in the bank and are getting out of real estate, then what’s left? The answer is gold. . . . I see a demand shock coming from China. . . . You could see a scramble to buy gold.”

Russian palladium exports spiked in April, in an attempt to cash out before any sanctions. The 69,400 oz. was over 10 times the monthly average this year of 6,500 oz., but far below peak exports in the six-digit range from just a few years ago.

Looking Ahead

The break lower in gold after the expiration of June gold options may be the correction that some analysts have deemed necessary for gold to move above the $1300 mark.

Narandra Modi’s election as prime minister in India is good news for gold. The pro-business Modi promised to implement measures designed to boost the Indian economy and restore national pride, including relaxing the severe restriction on gold importation. How much of an increase is Modi willing to absorb in the CAD, or will he make easing gold restrictions contingent on an expanding economy?

The Indian government recently released a report that gold smuggling increased by six times in the last fiscal year, which ended March 31. Before the 10% import tax and import restrictions, India was the world’s largest buyer of gold.

PLATINUM AND PALLADIUM

China announces it will force 300,000 old cars off the road in Beijing, and six million nationwide by end of year. Auto exhaust causes 31% of the smog in Beijing, and low quality gas just makes matters worse. Smog levels can reach literally deadly levels in many Chinese cities, and the nation will need TONS of palladium and platinum for new cars and gasoline refineries. Platinum and palladium (Pd) are used in the catalytic converters of cars to reduce emissions. (Note: Russia and South Africa account for nearly 80% of the total global supply of these two metals.)

Johnson Matthey Plc said in a statement, “Supply shortages for platinum and palladium will be the largest in more than three decades.” The Bloomberg report also stated there would be a deficit this year of 1.22 million ounces of platinum and 1.61 million ounces palladium.

This might be a good reason to keep an eye on platinum and palladium prices in the coming months amid record deficits, increasing demand and restricted supply.

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