Welcome to SurvivalBlog’s Precious Metals Month in Review, by Steven Cochran of Gainseville Coins 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 August?
Every August, most of Europe is off on summer vacation, as are a good number of Wall St traders. With far fewer trades per day, liquidity suffers. Orders that normally would not be big enough to move gold prices have a larger effect when fewer traders are participating.
And so the case was for gold in August. It started the month at a three-week high, jumping over $10 an ounce to trade in a range between $1350 and $1360. On August 5th, the non-farm payrolls report came in much better than anticipated. This raised the odds that the Fed would raise interest rates next month,and knocked gold down by $20.
Strength in gold prices the following week lead to some short-covering in the futures market and some bargain hunting in physical. As usual, it was the chain reaction of “Probability of Fed Rate Hike ? Dollar Price ? Gold price” that moved the markets.
On August 24th, gold prices edged down enough to trigger some automated selling, which then triggered more automatic selling. A $10 fall in the spot price saw gold trading under $1330 for the first time for the month. Hawkish press conferences by Federal Reserve officials designed to prop up the dollar kept gold prices between $1320 and $1325 for the rest of the month.
Factors Affecting Gold This Month
Most of the factors affecting gold in August could once again be labeled “central banks behaving badly”. Mario Draghi over at the European Central Bank and Haruhiko Kuroda at the Bank of Japan keep distorting the natural behavior of the markets, hoping they will eventually do what their theories say they will do. In the meantime, they keep inflating the stock bubble and artificially suppress interest rates so their nation can borrow more money to keep up their deficit spending.
Negative Interest Rates
Speaking of interest rates, the negative rates that the ECB is forcing onto European banks have pressured them so much that they are passing on the negative rates to large consumer deposits. Banks have been charging large corporate and institutional clients negative rates since the ECB imposed them in 2014. Some of these banks are signaling their discontent over the central bank’s market distortions by threatening to pull billions out of the system and hoard paper banknotes. You know you’ve gone off the reservation when the IMF warns that your policies are distorting the financial market and endangering banks. The Fed is up to its old tricks of having regional Fed presidents saying two opposite things to keep the markets guessing on the timetable for the next rate hike. They fail to realize that uncertain markets are frail markets. The uncertainty wasn’t helped when the release of the July FOMC meeting minutes revealed a split ticket on the subject of raising interest rates now, opposed to later. This whipsawing of the markets ended the last week of the month, as everyone from Yellen on down pushed a hawkish theme to make the markets believe that the Fed could raise interest rates in September, if they wanted. There are more than the usual reasons to think that the Fedheads are full of hot air. A study showed that since 1990, when the Fed actually began telling the public when it adjusted interest rates, there has never been an interest rate hike in the two months prior to a Presidential election.
Brexit
While some recent upbeat economic news in the UK has many Brits who voted to leave the EU saying “I told you so”, there are plenty of surprises lurking behind the scenes. One is the very real possibility that banks in London’s famous financial district may be cut off from easy business with the rest of the EU. All banks in the EU are allowed to do business in all EU countries without having to form a branch in each nation. The co-leader of German Chancellor Angela Merkel’s political party told reporters, “If you’re member of a club you have certain benefits, but if you’re out, you will not have the benefits any more.” Similarly, the German economic minister said that “we need to make sure that we don’t allow Britain to keep the nice things, so to speak, related to Europe while taking no responsibility.” What he and others really mean is, they have to make Brexit so painful for the UK that no other country will want to go through with leaving. Meanwhile legislators in Northern Ireland have filed suit against the UK government to stop Brexit, on grounds that any move to withdraw from the EU violates the North Ireland consitution. Scotland, who voted not to leave the UK in 2014 because it would remove them from the European Union, has been upset ever since the June 23 Brexit vote. Feeling that they were double crossed, some Scots have started agitating for a new independence vote.
On the Retail Front
On the subject of Brexit, the Royal Mint reported that the day after the Bank of England cut interest rates and started their quantitative easing/money printing scheme, traffic to the Mint’s bullion trading site spiked 250%. That translated into 25% higher sales and 50% higher profit from the week previous.
Across the Irish Sea, demand for gold in Northern Ireland has doubled. Some Belfast jewelers have a waiting list for gold Sovereign coins. Why Sovereigns in particular? They are exempt from Capital Gains Tax in the UK!
The U.S. Mint reported that Silver Eagle and Gold Buffalo sales are down this summer, but Gold Eagle sales are up. According to the latest data from the U.S. Mint, there have been 483,000 1 oz Gold Eagles, 51,000 half-oz Gold Eagles, 100,000 quarter-ounce Gold Eagles, and 615,000 tenth-ounce Gold Eagles sold so far this year, for a total of 595,000 troy ounces of gold.
The Swiss central bank revealed that it made a profit of 7.6 billion francs on its gold holdings for the first half of the year.
The Austrian Mint published its 2015 annual report this month, showing that last year was the third-best year in history for the 822-year old mint. With gold still trading almost $300 an ounce higher this year, we look forward to seeing the sales figures for 2016.
The Russian central bank announced that the 200,000 troy ounces of gold it bought last month put Russian gold reserves over the 1,500 metric ton mark.
Millions of Indian farmers are celebrating the end of a two-year drought by using profits from their crops to push gold demand up 20% from July. The Indian fall wedding season is starting, and gold jewelry can account for up to 50% of the cost of a wedding.
Market Buzz
We read a lot of articles this month regarding the gold market, and most are pointing in the same direction: up. Since we’re heading into fall already, our own Everett Millman looks forward with the gold outlook for 2017.
All this extra gold demand has meant the revival of the “cash for gold” business.
The World Gold Council announced that the first six months of 2016 were the second-best first half performance for gold in history. The 25% gain in gold prices was the best six-month start in more than 35 years. Investment demand was the largest component of gold demand for two consecutive quarters, the first time this has ever happened.
Simon Black at Sovereign Man forecasts that gold prices could jump by 50%, once the multi-billion dollar institutional funds finally decide to stop buying zero-yield bonds and overpriced blue chip stocks. He notes that the $7 trillion global gold market is the only large asset sector that is both undervalued and can absorb the billion dollar trades these funds make. Jim Rickards warns that the extraordinary monetary policies of the world’s central banks are set to fail. He notes that waiting for the panic before buying could leave you with hands full of debased fiat currency. “Physical gold is very scarce; when the price really does break upwards, you’re not going to be able to get it. The time to get it is now,” he said. Those playing with gold futures and ETFs will also be left in the cold. “When everyone wants to convert their paper to physical (gold)…there’s not going to be enough to go around,” Frank Holmes, at US Global Investors, echoes the theory that a shortage in physical gold is looming. Gold production is falling, as older gold mines are exhausted. He says it can take 20 years or more to build a new gold mine, and that’s assuming you have already found a large deposit. If demand for gold keeps growing, we all know what will happen to the price. On CNBC’s “Fast Money,” trader Brian Kelly says the uptrend in gold remains intact, thanks to central banks. In the world of negative interest rates on deposits, the old gold bear taunt about gold and cash has reversed: “The old joke used to be that gold’s a rock that you pay somebody else to store,” said Kelly. “Well now [paper] cash is that rock.” The World Gold Council calls the present global economic situation a “perfect storm” for gold. With bond yields artificially suppressed by central banks to zero or below, gold is the only safe haven asset that gives a positive return (due to rising prices).
Waking Up On Wall St
More analysts at TBTF banks on Wall St are waking up to the fact many of us have known all along: gold is stable money in a world warped by central bank policies.
For example, Deutsche Bank analysts reveal the reason behind the April 2013 flash crash in gold. Oh, and they have a target of $1,700 gold, using a “gold to central banks balance sheets” formula.
Over at Fidelity, analyst Nick Peters says that investors should still be buying gold, even with the recent price gains.
If anyone should know when to buy gold, it should be the head of the Rothschild family. Lord Rothschild has cut the family’s exposure to equities from 55% to 44% this year, selling hundreds of millions of dollars in stocks and adding to the trust’s position in gold. He points to negative interest rates and quantitative easing from the central banks as his reason to get out of overpriced stocks. The Rothschild Investment Trust has returned 58% over the last three years. High-net-worth individuals (the “1%”) are looking to offshore havens to store their bullion– places like Singapore, where precious metals storage has nearly doubled at one of the leading vault providers.
While on the subject of private vault storage outside the banking system, the Comptroller of the state of Texas has issued an open Request For Proposal from those companies wanting to build and operate the planned Texas Bullion Depository. Those guys digging for the underground Nazi Gold Train in the mountains of western Poland have come up empty, but the locals have struck paydirt catering to the tourism the story has encouraged. The fight over the ten Langbord 1933 Double Eagles may be on its way to the Supreme Court, after the family lost an appeals court judgment
Looking Ahead
We end this month back in India, where police pulled over a drunk driver in a minivan, only to find out he was was delivering $30,000 of coins from the central bank by himself, with no guard.