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 silver and examine the “what” and “why” behind those numbers.
Gold had a wild ride to start the year, with plenty of economic and political turmoil to power the roller coaster price action. We saw prices move from $1,170 to $1,305, as turmoil rocked Europe, only to crash back to near $1,250 after a Federal Reserve policy meeting that the market makers deemed hawkish. Even so, gold had its best month in over 1-1/2 years in January. Silver had its best January in over 30 years, before the FOMC meeting put the brakes on all the markets.
Precious Metals Market Drivers in January
January saw elections, quantitative easing, and volatility in equities, but two things most talked about was the dominant US dollar and the complete collapse of the oil market.
THE DOLLAR ASCENDANT
The U.S. dollar continued to crush all rivals in January, with some analysts saying that it is still weak compared to historical inflation-adjusted levels. BMO Capital forecasts that the USD could rise another 15% in 2015. While a strong dollar is welcome news to U.S. consumers whose wages haven’t raised in years, there are some downsides as well. Curiously enough, Peter Schiff tells us that it was gold that was the best-performing currency against the dollar in 2014. The big gains of the dollar have also magnified the effects of oil prices.
PLUMMETING OIL
Crude oil prices continued their plunge in January, with the Saudis vowing to not play the patsy and cut production while everyone keeps pumping (like what happened during the last oil glut.) U.S. shale fracking and increased output from Iraq, Iran, Libya, and Russia, during a time where the global economy is slowing down, means producers are in a tough bind. The Arabs are PLUMMETING OILdetermined to hold the line and drive the highly-leveraged shale drilling companies out of business in order to reduce the supply coming onto the marketplace. In fact, with crude prices dropping under $50 a barrel, Saudi prince Alaweed bin Talal told reporters that “I’m sure we’re never going to see $100 anymore. I said a year ago, the price of oil above $100 is artificial. It’s not correct.”
U.S. drilling operations in North Dakota and Oklahoma have already started scaling back, and as more of them try to refinance their high-yield debt (a.k.a. junk bonds), it could force so many bankruptcies in the energy sector that the Federal Reserve may be pushed back into a new round of printing money. James Rickards believes that the collapse of the energy sector junk bond market would spread into other junk bonds and could ignite the largest financial panic ever.
SWISS BREAK PEG TO EURO
With the European Union falling deeper into deflationary conditions, speculation became rampant that the European Central Bank would have no choice but to start its own money-printing operation to buy government debt. The road was cleared for such a plan when the EU courts ruled on January 14 that quantitative easing by the ECB would not violate the treaty that established the central bank. “Someone” figured out what was going to happen before it did, because 40,000 call options on GLD were purchased two days prior, betting that gold would go up $130 an ounce to $1,360/oz by the end of March. If gold hits that mark, the unknown trader could make a profit of up to $50 million.
The day after the court ruling, the Swiss central bank abruptly abandoned its policy of selling Swiss francs to maintain a peg of 1.20 to the euro. As the shocks of Switzerland’s de-pegging the franc rocked the marketplace and wiped out many investors who had bet on the “sure thing” of the Swiss keeping the peg to the euro, gold jumped $30. The Swiss Surprise was seen as confirmation that the ECB would indeed begin quantitative easing later that week.
ECB BEGINS PRINTING MONEY
On January 22, ECB QE was announced. The plan unveiled by ECB president Mario Draghi was larger than expected (60bn euro vs 50bn), and longer than expected (18 months vs 12 months). Gold and the U.S. dollar rose sharply. Stocks rose to a lesser extent, moderated by poor earnings reports that day and an above-expected first-time jobless claims report. Gold denominated in euros hit a 21-month high the day after ECBQE was announced, with the euro at 11-year lows versus the dollar.
Under the 1.1 trillion euro asset purchasing scheme, the ECB will not hold more than 33pc of any issuer’s debt and will not buy more than 25pc of any issue. This freezes Greece out of the QE program, since the ECB already holds the legal limit of Greek debt. The Greek government will not be eligible for the new bond purchases until July, and Draghi warned the Greeks that any further purchase of Greek bonds by the ECB would depend on the new government in Athens continuing with the agreed-upon austerity program that accompanied their bailout money.
GREEK ELECTIONS
There’s a fat chance of that, as new socialist prime minister Tsiperas refused entry to the country to EU and IMF financial inspectors, for the purpose of reviewing the Greek government’s progress on austerity measures. He flatly rejects the current bailout conditions under which Greece has already borrowed (and owes EU nations) €240 billion. Tsiperas is demanding new negotiations from scratch and an end to German-enforced budget cutting and privatization on the part of the Greek government. In an unmistakable signal to Merkel, his first act as Prime Minister was to lay flowers at the memorial to 200 Greeks executed by the Nazis in WWII.
To add some bite to his blackmail demands, Greece vetoed an expansion of EU sanctions against Russia for escalating violence in the Ukraine war. To understand the possible consequences of an exit by Greece from the EU (called a “Grexit”,) Koos Jansen wrote this inside look at the last time Greece almost left the EU and the possible consequences. For a little more background, check this easy to read infographic on the Greek Crisis.
THE FEAR TRADE
It isn’t just the socialists who are running Greece shaking the markets. The Charlie Hebdo terrorist attack in Paris, deflation, stock volatility, the global economic slowdown, and unexpected large policy changes by central banks have millions of people spooked. As Nobel Prize-winning economist Robert Shiller notes, people are afraid of what kind of world their children will face, and so they are willing to take negative yields on government bonds (actually paying the government for the privilege to loan them money) in exchange for financial safety.
With Greek leftists blackmailing the EU, terrorists gunning down civilians, and the European Central Bank printing money, Europeans are snapping up gold. Germans, French, and Italian private investors purchased physical gold at a rate 41% above last year this month.
Another sign the debt-fueled Ponzi scheme that is the stock market is coming apart is the story of the $100 million hedge fund that went bankrupt in December. The multi-trillon dollar corporate junk bond market is beginning to crash as well. A Chinese company became the first to default on its bonds this month, and the market panic is spreading from junk bonds to investment-grade corporate debt.
FOMC
Janet Yellen and the Federal Reserve did a big number on ALL the markets this month with the open-market policy meeting. After the meeting announcement showed no signs of the Fed backing down on plans to start raising interest rates around mid-year, stocks plummeted, as the shock of no more free money sank in, and gold was hit on the prospect of an even stronger dollar.
Notably missing was the phrase “for a considerable time” when talking about when to hike interest rates, which Wall Street took as a sign of the Apocalypse. The Fed said that downward pressure on inflation from the 50% drop in crude oil prices was only temporary and not a reason to delay normalization of economic policy.
On The Retail Front
It’s January, so Silver Eagles are in the news, of course. 2.9 million American Silver Eagles were snapped up on the first day of sales, and the month finished at over 5.4 million ounces.
The British Royal Mint announced that it is back in the bullion bar business after an absence of 47 years.
The annual gold-buying frenzy in China for the Lunar New Year has started. It will be a long buying season this year, as the lunar new year isn’t until February 19.
Market Buzz
Again, from Asian precious metals market expert Koos Jansen, we learn of the silver boom in India that’s going on, as well as the fact that Shanghai silver volume is now 37% larger than the COMEX.
The huge gold volume in China, also covered in the above article, is why CME– the owners of the COMEX exchange– have launched a kilobar gold contract in Hong Kong.
James Rickards says that the global manipulation of gold by central banks is so China will have enough gold reserves to match Western governments in the coming “currency reset”. According to him, after the world’s currencies are reset, they will not be as vulnerable to gold, and the price will be allowed free movement.
China isn’t the only government gobbling up gold, as Russia added to its gold reserves for the ninth straight month. A large part of this is to support the domestic gold mining industry, which is locked out of Western markets due to sanctions over Ukraine, but Moscow is probably happy for any excuse to spend rubles for hard assets before the currency devalues any further.
Western investors are getting into the act as well, as inflows into gold ETFs jump.
Rampant manipulation in the gold and silver fixes may be more subdued, now that British financial regulators are monitoring them.
Low prices are about to claim the entire gold mining sector in Zimbabwe, unless the government there eases back on their tax burden. Gold provides about half of Zimbabwe’s exports by value.
Looking at all of this together, Marc Faber may be right when he says gold will rally 30% as people lose faith in central banks. While he notes that there’s no way to “short” central banks, the closest thing to it is buying gold, which he calls the “trade of the century.”
Of course, the mainstream media LOVES to talk about how gold prices dropped last year, but that is ONLY true in the U.S. In every other currency in the world, gold prices rose in 2014. Gold also beat every stock market in the world, except the U.S. and Canada, in 2014. That’s not bad for a “barbarous relic”, is it?
Looking Ahead
February will bring us more gold buying in the Chinese New Year, fighting in Ukraine continuing to increase with Greek PM Tsiperas poised to block more EU sanctions on Russia, and Merkel vs Tsiperas in a fight over Greek debt forgiveness and/or restructuring.
The big question here at home will be, will the U.S. economy be able to resist being drug down by the rest of the world?
We end this month’s column with an update on German Gold Repatriation from the Fed. It seems that the Bundesbank actually got some gold out of the vaults of the New York Federal Reserve last year, to the tune of 85 metric tonnes!