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 July?
I hope that nobody followed that old saying “Sell in May and go away,” because gold had a very, very good month in July. Both gold futures and spot gold repeatedly shattered all-time record prices in the last half of the month.
Gold built on the base formed at $1,800/oz to start the second week of July. After about July 20th, the yellow metal began to pick up steam. Amid a rally that lasted for 9 consecutive trading sessions, the gold price jumped $40 per ounce on July 27th to new nominal all-time highs.
Finally, we got some consolidation just before month-end. There was a significant pullback from gold’s highs around $1,980 per ounce on Thursday, July 30th. A sell-off in global equity markets that session prompted investors to liquidate long gold positions to cover margin calls from stock losses. Another reason for the big drop was the fact that weekly and monthly options both expired that day.
Silver hit 7-year high during the last week of July before giving back some of the gains. Nonetheless, the silver price has virtually doubled from its March lows around $12/oz to above $24/oz to close out the month.
Factors Affecting Gold This Month
CHINA–US RELATIONS SOUR
The closing of consulates between the United States and China, as well as new international sanctions against Beijing, are continuing to upend the world economy and global trade relationships.
It’s not just a struggle between these two world powers, either. Tensions have ramped up between China and its other neighbors: India moved 35,000 more troops to the disputed border with China in the HImalayas. China has moved tanks and artillery into the region, as it tries to seize more territory to widen a corridor to Kashmir and Pakistan.
FED & REAL INTEREST RATES
One major tailwind for gold is negative real interest rates. Investopedia defines real interest rates as “Real Interest Rate = Nominal Interest Rate – Inflation (Expected or Actual)”.
In a note circulated before the new highs, Commonwealth Bank of Australia’s Vivek Dhar said the fall in U.S. 10-year real yields has been the “most important driver.”
A handy sign for real interest rates is the 10-year TIPS bond. So long as this key rate remains in negative territory, gold looks attractive as a safe haven with its 0% yield compared to Treasury bonds that actually offer a negative real yield.
The DXY dollar index spent a good part of July hitting successive two-year lows. This helped gold buyers not just in the US, but in most foreign buyers as well. Since gold is priced in US dollars, a weaker dollar means it takes less of a foreign currency to buy gold in foreign markets.
Weakness in the dollar has been in part due to the fractured response to the COVID recession from Congress, compared to other nations. Ironically, it’s also in part because of good news on progress on a COVID vaccine, which reduces the safe-haven appeal of the USD.
CENTRAL BANK ACTION
On June 30th, the Federal Reserve began a $500 billion plan to buy corporate bonds. The Fed has signaled a new policy of unlimited intervention in the bond market to artificially impose a yield curve on Treasuries in order to prevent an inverted yield curve. (As of now, only the beleaguered Bank of Japan is engaging in this type of policy madness.)
Meanwhile, the European Central Bank (ECB) added another €750 billion program to their stimulus measures during July.
It was another record month for gold ETFs in July, as assets under management hit another all-time high. ETFs gained for the seventh month in a row, adding 104 metric tons. Most of this went to US funds. Collectively, gold ETFs now hold a record 3,621 metric tons of gold. If all the gold ETFs were a nation, their gold reserves would far and away be the second-largest in the world.
Inflows for the first half of 2020 was 734 metric tons, higher than any other entire YEAR. First half gold ETF inflows are also greater than the all-time annual high for central bank gold purchases. At this rate, global gold ETFs could consume 45% of this year’s world gold mining production.
North American ETFs saw inflows of 80 metric tons in June ($4.6 billion).
European ETFs saw inflows of 18 metric tons ($745.7 million), with most of this going to Germany and Switzerland.
Asian gold ETFs are still suffering from COVID-related economic shutdown. The region’s gold ETFs only saw 0.4 metric tons of inflows, mostly in India.
The “Other” category gained 3 metric tons ($151 million) of gold.
Central Bank Gold Purchases
Compared to gold ETFs, central banks have been quiet. This makes sense, as they throw all the money they can print into fighting the economic effects of the COVID pandemic. Turkey was on top again this month, bringing in 36.8 metric tons of gold. India’s central bank purchased 2.8 metric tons, and Uzbekistan bought 6.8 metric tons.
Three nations were notable for central bank gold sales. Kazakhstan sold 4.4 metric tons, Mongolia sold 3.3 tons, and Colombia sold 0.9 metric tons in June.
On The Retail Front
On July 27th, the US Mint put both its gold and silver bullion coins “on allocation.” This means that Authorized Purchasers (and the dealers they supply) can expect rationed quantities of these products for the next several months.
Reporting on a classified mint document obtained by Bloomberg News revealed:
Reduced workforce at West Point Mint due to coronavirus safety measures.
Reduced production capacity means West Point facility can’t mint both gold and silver at the same time.
Shortage predicted to last from 12 to 18 months.
San Francisco facility was partially re-opened in May, likely in order to help with the shortage of circulating coins.
The U.S. Mint is asking all Authorized Purchasers (APs) to submit 10-day and 90-day demand forecasts, which will be used to determine allocation.
Michael White, the spokesperson for the United States Mint, confirmed to me in an email that the San Francisco Mint will be assisting in production of American Silver Eagle coins.
Overall, retail gold demand fell 6% in the first half of the year, due mostly to lower jewelry demand in Asia. Lockdowns and job losses in India and China from the COVID pandemic have taken away the disposable income from nearly 2 billion people.
The most recent data from the World Gold Council showed that gold consumption in India during the first half of this year (Jan–Jun) plunged -56% year-on-year to 165.6 metric tons. Despite the big drop-off in jewelry consumption worldwide, investment demand for gold has more than made up for the lost sales.
Demand from green technology manufacturers, precious metal investors, as well as hampered production due to COVID-19 mine suspensions (Latin America) are all aiding silver.
With gold on the cusp of breaking their 12-month forecast of $2,000 gold, Goldman Sachs raised their target to $2,300. Silver’s July high of $24 breaks Goldman’s 12-month call of $22, so they raised it to $30.
Analysts at Commerzbank caution that record-high prices for gold will weigh physical demand from Asia. Demand from investors in the West, therefore, will be important to watch.
In a note, analysts at TD Securities suggested that dollar debasement will be the key theme driving gold prices higher going forward.
The tight silver market (in terms of mining supply) is only going to get worse, says Keith Neumeyer, CEO of miner First Majestic Silver, in an interview with Kitco News.
Gold should move higher and higher as long as there is no COVID vaccine.
An impending equity bear market will ultimately push the gold price to $4,500 per ounce, according to Bloomberg Intelligence.
‘In reality, virtually everything is going gold’s way – record debt, epic increase in money supply, silver catching up, negative real yields, and even a dollar correction.’ — Ross Norman, Metals Daily
Looking Ahead To Next Month
Even as the economy slowly improves, gold can keep climbing. Inflation tends to accompany higher GDP growth, and real rates (i.e. interest rates minus the inflation rate) continue to slide into the negative. That’s very positive for a non-yielding asset like gold. Moreover, nobody expects interest rates to rise anytime before 2022.
Gold may be topping for the time being as it approaches $2,000 per troy ounce, but ongoing factors such as a weaker dollar, higher inflation, and negative real interest rates could continue to support higher gold prices. The more interesting test will be whether or not silver, historically the more volatile of the two precious metals, can hold onto its handsome gains from this month.
This column is intended for educational purposes only. It is not intended as investment advice. –
Steven Cochran of Gainesville Coins.