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.
What Did Gold Do in January?
Gold began the year with a large $28 drop, to end the day at an even $1,800. A rally to $1,825 was negated on the 6th by a $36 drop, to settle at $1,789. Gold spent two more days under $1,800, rising $20 to $1,818 on the 11th. Prices remained above $1,800 through the 26th, hitting the high for the month at $1,852 on the 25th.
The Fed announced an unexpectedly hawkish reaction to growing inflation on the 25th, immediately leading the market to price in five rate hikes this year. This sent gold tumbling to end the month, falling $77.60 in four sessions.
Factors Affecting Gold This Month
BOND YIELDS
Markets began January unsure if there would be a rate hike at all in March. The narrative began changing almost immediately. Yields on the 10-year Treasury note rose to 1.7% on the 6th and never looked back, hitting successive 2-year highs. The yield on two-year Treasuries rose above 1% and the ten-year yield broke above 1.8% the third week of January, as markets fully digested the likelihood of four rate hikes by the Fed.
Treasury bonds are considered risk-free. When their yields rise, the opportunity cost of gold rises, reducing demand.
US INFLATION
The Fed was forced to move faster than they may have wanted due to spiking inflation this month. If there was any doubt that they would have to raise rates at the next FOMC meeting in March, those thoughts were blown away in the middle of the month.
Consumer inflation hit a 40-year high of 7% and wholesale inflation rose 9.7%. Consumer spending collapsed on inflation worries in December, coming in at -1.9%. Overall wage growth came in at 4.5%, the highest in 20 years. but consumer inflation of 7% means that real wages are actually falling. These high inflation numbers moved the probability of a March rate hike to 95%
It isn’t just the US that is seeing suddenly higher inflation. Inflation in the UK hit a 30-year high of 5.4%, driven by supply shortages and energy costs more than quadrupling. Canadian inflation hit a 30-year high of 4.8%
ENERGY/OIL
Europe continues to pay the price of assuming cheap Russian natural gas would always be there for the asking. Electric bills are expected to triple this year because Russia isn’t shipping any extra gas to Europe. This is forcing steel mills and other industries to shut down because they can’t afford to pay the high energy prices. A shrinking economy and energy-fueled inflation mean that the EU should be falling into stagflation soon.
On the global front, it is increasingly obvious that most of OPEC can’t pump the amount of oil that they are entitled to under the production agreement. This leaves Saudi Arabia and Russia as the only two big oil exporters that can actually increase production.
Green initiatives pushed US oil companies to cut exploration and expansion of existing oilfields. This means that American oil production is lower now than it was five years ago. These supply shortages caused oil to reach $90 per barrel this month. This is having a spillover effect throughout the economy and is one of the main causes of the present spike in inflation.
A Houthi missile attack on UAE this month was foiled by anti-missile defenses. The UAE conducted airstrikes on Houthi-held territory in Yemen in retaliation. The targeting of the UAE’s oil production facilities is raising fears that $100 oil will soon be upon us.
UKRAINE
Russia continues its military buildup on the Ukrainian border, using the threat of war in an attempt to wring concessions from Europe and the US. This massing of troops is the largest since WWII.
Putin seems to think that it is 1972, not 2022, as he demands all NATO forces to be withdrawn from all nations that the Soviet Union used to control. This of course will never happen, but he may think that he can get something out of his “ask for the loaf, get a slice” approach.
NATO, the EU, and the US are threatening massive sanctions against Russia if it invades Ukraine, but Russia is using the threat of cutting off all natural gas and oil exports to the West in return. Russia has already broken the united front the EU wants to present, as Germany refuses to endanger its access to Russian natural gas by supporting Ukraine.
All this is sending oil and gas prices higher, and destabilizing the structure of the EU. If anyone in Europe has money to spare after paying their heating bills, it’s probably going into gold.
The Fed
The December FOMC minutes released on January 5th confirmed recent indications by the central bank that it would raise interest rates three times this year. The surprise was the dot plot revealing the probability of three rate hikes next year when it was assumed that there would only be two.
This all went out the window on the 26th, when the Fed announced a far more hawkish roadmap. The statement “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” has everyone assuming that there will be a rate hike at the next FOMC meeting in March.
Powell revealed in his post-meeting press conference that the Fed might go as far as hiking interest rates five times this year. There are only seven more FOMC meetings this year, including the next meeting in March.
After the FOMC meeting, the CME FedWatch market tool shows a zero percent chance that there won’t be an interest rate hike in March. There’s an 88% chance of a normal 25 basis point hike and a 12% chance of a monster 50 basis point rate hike. At the start of the month, there was only a 70% chance of any rate hike at all.
Central Banks
The Fed’s unexpectedly large hawkish policy changes have put other central banks behind the eight-ball.
ECB Vice President says the central bank is “fully convinced” that inflation will start slowing down on its own early this year. I guess we will find out, but it may be too late to stop stagflation from setting in across Europe.
Opinions have changed on the Bank of England’s policies since this month’s Fed pivot. Markets are now pricing in four rate hikes this year.
The Bank of Canada did not raise rates this month, raising more than a few eyebrows. Market watchers had given a 70% chance of a rate hike by Ottawa this month.
Central Bank Gold Purchases
This month’s Central Bank Gold Purchases covers November. Central banks sold 12.5 tons of gold as a whole in November, as Uzbekistan unloaded 21.5 tons by itself. Reports indicate that the nation’s central bank will sell into big rallies to lock in profits. This is likely what happened in November, when prices spiked over $1,860 an ounce in the middle of the month. (There’s no capital gains tax when you’re the government!)
Other central banks that sold gold in November include Turkey, which sold 7 tons apparently for funds to stabilize the lira against the dollar; Russia, which sold 3.1 tons; and Kyrgystan, which sold 1.4 tons of gold.
On the buy side, Kazakhstan led with a purchase of 4.2 tons of gold; Poland kept to its plan to buy gold every month until it has increased reserves by 100 tons; India purchased 2.8 tons, and the Irish central bank once again appeared in the gold market, buying 0.7 tons (700kg).
Gold ETFs
Outflows from North American gold ETFs in December outpaced gains in Europe and Asia to bring net global gold ETF holdings down by 6.4 tons.
North American ETFs saw 21.6 tons of outflows as it became apparent that the Fed would have to raise rates earlier and more often than previously expected. European gold ETFs recorded 8.3 tons of inflows on geopolitical jitters regarding Ukraine.
Asia’s 8.1 tons of inflows were focused in China, where doubts remain whether the government can prevent the implosion in the nation’s real estate sector from dragging the entire economy into recession. “Other” nations saw 1.2 tons of outflows, with South Africa being the culprit.
On January 21st, the SPDR Gold Trust ETF (GLD) saw the largest daily inflow dollar-wise since 2004. $1.63 Billion (27.6 metric tons) of gold flowed into this gold ETF in a single day. That wipes out all of December’s outflows.
Dollar and Forex
January has been a good month for the dollar, as imminent rate hikes by the Fed support the greenback. The Fed is by far the most hawkish of the major central banks, so continued dollar strength is expected. A stronger dollar makes gold more expensive in other countries, suppressing aggregate demand.
On The Retail Front
The US Mint did not update bullion coin sales at all during the last week of January. These are the most recent figures we have:
Sales of bullion Gold Eagles of all sizes totaled 166,00 ounces. 53,000 1oz Gold Buffaloes sold in January, for a total of 219,000 ounces of gold bullion. 4,502,000 Silver Eagles were sold this month.
An industry trade group reported that Chinese retail gold consumption for 2021 was 36.5% higher than last year and 11.8% higher than 2019. Sales of gold jewelry in 2021 grew by 45% year to year, to 711.3 tons, and bar and coin demand grew by 26.8% to 312.86 tons.
Gold demand in India was the highest it’s been in many years, in 2021. Indians went more for bars and coins last year than jewelry, in contrast to China. Demand for gold bars and coins rose 79% to 797 tons. Jewelry sales doubled to 265 tons, as millions of wedding gifts were purchased.
Market Buzz
Ray Dalio says “Gold is still my favorite because of certain qualities. For example, you can’t trace it. In Bitcoin you can trace who owns it, where it’s going, and so on. A gold piece of coin, it’s not connected.”
Market analysts at Degussa say “we believe that, at the end of the day, central banks will prioritize the goal of ‘keeping the economies going’ over ‘bringing inflation down’. This means that policy tightening will be much less pronounced and remain largely cosmetic, keeping inflation-adjusted interest rates well in negative territory.”
Goldman Sachs Group Inc. raised its 12-month outlook for gold from $2,000 to $2,150 following Powell’s comments after the FOMC meeting. They expect slower U.S. growth, a rebound in emerging markets excluding China, and faster inflation to move gold higher.
Ole Hanson at Saxobank remarks that gold actually didn’t do so bad in 2021, considering it was fighting against a dollar that was at six-year highs. He says the two most important things affecting gold prices this year will be the Fed and the Chinese economy.
Jewelers in India were still loading up on gold this month. They expect demand to jump on a very busy wedding season. Millions of weddings had to be postponed last year due to COVID lockdowns, and some weddings have been on hold since 2020. Everyone is taking the first chance they get this year to tie the knot.
Looking Ahead To Next Month
January was a very bad month for stocks. Were the large losses due to a rotation out of high-priced growth stocks into cheaper value stocks, or will the correction widen to engulf those stocks as well? If the selloff continues and/or expands, bonds will benefit. This would bring bond yields down, and lend a hand to a recovery in gold prices.
The Chinese New Year takes place during the first week of February. Markets will be closed in China and South Korea. This will result in thin trading in gold futures, resulting in volatile prices.
Even with Goldman Sachs and Bank of America telling investors not to forget gold as an inflation hedge, market skittishness may limit gains in gold rallies next month.
You may want to adjust some of your motion detectors after reading this story about the “Snake Man” robber ( who slithered along the floor to avoid setting off alarms and stole $65,000 worth of silver in two burglaries in southern California recently.
This column is intended for educational purposes only. It is not intended as investment advice. Past performance does not guarantee future results.
– Steven Cochran of Gainesville Coins
JWR Adds: I heard that Gainesville Coins is having a sale on random-date 1oz American Gold Eagles. Quantities are limited.