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 June?
May was the best month for gold since July 2020. June, not so much.
Gold gained 7.8% in May, which brought year-to-date returns back in the green. June took nearly all that back, falling from $1,905 on June 1 to a 10-week low of $1761 to end the month. June suffered the worst monthly drop in gold prices since 2016.
The bad news started on June 3rd, when gold lost $36 to drop from $1909 to $1873. June 2nd was the last day of the month that gold would be above $1900.
The nuclear bomb for gold prices was the FOMC meeting, which came out more hawkish than expected. Gold dropped $86 in one day, from $1861 to $1774. Gold spent the rest of the month between $1783 and $1763.
Factors Affecting Gold This Month
INFLATION FEARS
June started on the wrong foot for gold bulls and those wanting QE to continue for a long time. On June 3, the ADP Private Sector Payrolls posted blowout numbers. 978,000 new private sector jobs were created in May, up from 654,000 in April. Economists had expected 680,000 new jobs. At the same time, first-time jobless claims for the week fell under 400,000 for the first time since COVID originally hit the US last March.
This put speculation of an imminent tapering of QE by the Fed onto the front burner. Gold hit its lowest point since mid-February.
Later in the month, consumer prices shocked to the upside. The CPI had its largest jump on an annual basis since August 2008, hitting 5%. Core CPI year to year increased by 3.8%, the largest jump since 1992. Used car prices, up 29.7%, and gasoline prices, up 56.2%, were the main culprits.
Producer prices were just as hot. Wholesale prices rose 6.6% in May compared to a year ago. This was the fastest increase since 2010. Agricultural goods were a big factor in the increase, with grain prices jumping 25.7%.
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Skyrocketing oil prices in June were a major contributor in the market’s higher estimates for inflation. West Texas Intermediate oil futures started the month at a two-year high of $68 per barrel. Prices rose as high as $74 per barrel by the end of the month.
Home prices were another huge reason for higher inflation. Sales of single family homes in April were 2.1% higher than in March, and an unbelievable 14.6% from a year ago. This was the highest spike in home prices in over 30 years. Several large cities set all-time highs for home prices, including Seattle, where houses are 20% more expensive than a year ago.
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The New York Fed survey of households on their expectations for inflation showed that consumers had a median estimate of 4% inflation by this time next year, an all-time high.
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The only other country experiencing growth is China. Supply bottlenecks are hitting the economy here as well, pushing wholesale prices to a 12-year high.This has the Chinese central bank on edge, and led the government to release copper and other commodities from their Strategic Stockpile to relieve the pressures of prices pushed higher by speculators.
FED TAPER FEARS
This month’s FOMC policy meeting was a hawkish one, bringing forward the expected date of interest rate hikes by nearly a year. The first interest rate hike is now expected in 2023, not 2024. In addition, the “dot plot” of expectations of Fed officials is pointing toward TWO rate hikes in 2023.
While still insisting that higher headline inflation will be “transitory,” the Fed now estimates that it will top out at 3.4%, not 2.4%. This of course pulls the end date of QE closer, as tapering will begin before increases in the interest rate.
At the post-FOMC press conference, Fed Chairman Jerome Powell said that continued supply chain shortages is “raising the possibility that inflation could turnout to be higher and more persistent than we anticipate.”
This crushed gold, leading to an $86 daily drop, and virtually extinguishing speculative longs on the COMEX. It was the worst week since March 2020 for gold, which plunged through the 100 DMA and 200 DMA, triggering cascading stop loss orders all the way down.
Stocks were also hit hard, but managed to recover. Gold and silver were not so lucky.
Dollar and Forex
The dollar rode a wave of good economic news higher in June. Starting just under 90, the DXY dollar index peaked at 92.44 on June 30th. This strength was to the detriment of gold and other commodities.
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The Peoples Bank of China spent June trying to rein in extreme levels of private sector debt, while also fighting to keep the yuan weaker than the dollar.
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In related news, Russia announced in June that it was in the process of removing all dollar assets from its $186 billion sovereign wealth fund. This was in retaliation for the country’s government being called out by president Biden for election interference, harboring hackers who were attacking American companies, and the imprisonment of Putin critic Alexi Navalny.
After the realignment, the Russian fund will be divided between the euro(40%), Chinese yuan (30%), gold (20%), yen (5%) and British pound (5%).
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Billionaire investor Stanley Druckenmiller speculates that the US dollar may lose its global reserve currency status in as little as 15 years. He noted “I can’t find any period in history where monetary and fiscal policy were this out of step with the economic circumstances.”
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The IMF reported that the dollar made up 59% of global central bank reserves in the fourth quarter of 2020 — a 25-year low.
Central Banks
European markets were shaken when news leaked of infighting at the ECB over inflation policy. To this point, markets had believed the central bank when it said it would continue easy monetary policy.
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The Chinese central bank spent much of the month continuing to crack down on the crypto market. It summoned leaders of the financial market to a meeting where it re-emphasized government policy for them to not facilitate crypto transactions or operations at all.
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Staff at the Turkish central bank have been purged to give the jobs to political loyalists of president Erdogan. 90 people, from the Central Bank Governor down to branch bank managers have quit or been fired, according to press reports. At least the new Governor has so far successfully fended off pressure from Erdogan to cut rates instead of raising them to combat high inflation and currency devaluation.
Central Bank Gold Purchases
This month’s World Gold Council report on central bank gold holdings covers April.
Buyers included the usual two “stans”, plus a neighbor. Kazakhstan bought 4.6t of gold, and Uzbekistan purchased 8.4 tons.They were joined in the gold market by the Kyrgyz Republic (Kyrgyzstan) who purchased 3.8t.
The Uzbeks are serious about increasing their gold reserves. This is the eighth month in a row that their central bank has purchased at least 7 tons of gold. The Kazakh central bank has an 11-month buying streak going.
The mind-blowing gold action among the world’s central banks was Thailand, which bought 43.5 tons of gold. This is the first time the Thai government has purchased gold since November 2019, when they purchased a measly 100kg. Turkey became a buyer again in April, after several months of large sales to gain dollars to fight the collapse of their currency. TheTurkish central bank added 13.4 tons.
The only central bank gold sales of note were actually bookkeeping transactions. Both Russia (-3.1t) and Germany (-1.3t) transferred gold from central bank reserves to their national mints, to keep up with gold coin and bar demand.
Basel III
Basel III, a new set of voluntary international banking regulations, went into effect this month. The biggest change for gold investors is the reclassification of allocated physical gold to Tier 1.
The Bank for International Settlements (BIS), the “central bank of the central banks”, now ranks allocated physical gold the same as cash and currency, as a risk-free asset. This means that banks no longer have to hold collateral against their allocated gold. Unallocated gold remains in Tier 3, the riskiest assets. Banks must carry 85% collateral on all their unallocated gold positions.
This is expected to stop the rehypothecation of gold by banks, as well as stopping entities from selling gold that they don’t actually own. The increased costs for holding unallocated gold is expected to greatly curtail what has until now been the cheapest way to trade gold. It is feared that this will dry up liquidity in the international gold market.
It may also spark a run on physical gold, as banks and traders try to convert unallocated to allocated. They will need more gold, since they say that they have more gold than they actually do.
We will keep everyone up to date as the fallout of these rule changes become clearer. In the meantime, we have a Basel III overview of where things stand now, to get you acquainted with the whole thing.
Gold ETFs
Worldwide, gold ETFs added 61.5 tons in May. This is the first month in four of gold inflows at the global level. The World Gold Council cites higher gold prices, higher concerns over inflation, a weaker US dollar, and more deeply negative real interest rates.
Global Assets Under Management total 3,628 tons. This is only 7% less than the all-time record high in tonnage, hit last October.
North American funds added 34.5 tons to holdings. European funds almost matched that, adding 31.2 tons. Euro action was mainly from Germany and the UK. Asian gold ETFs saw 3.3 tons of outflows. This was from Chinese investors rotating into a risk-on posture as their stock market outperformed. Chinese gold ETFs lost 3.6 tons last month, marginally offset by Japan and India.
On The Retail Front
The US Mint reports that gold coin sales are up 360% over last year. Sales numbers for June have been curtailed as the Mint continues stocking up for the July release of the Type 2 American Gold Eagles and Type 2 American Silver Eagles.
This will change dramatically next month, as the new ASE and AGE designs will hit the market.
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PERTH MINT bullion sales in May were down from April, but far ahead of last year’s sales. Perth Mint sold 1.7 million ounces of silver bullion coins and bars in May. That was 5.4% lower than April, but up 70.6% from last May. Gold bullion sales for May were 91,146 ounces, down 10.1% month to month, but up 43.8% year to year.
Market Buzz
All the forecasts from early in the month were completely invalidated by this month’s plunge in gold prices, so we’re focusing on interesting news you may have missed.
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West Virginia Congressman Alex Mooney is pushing a bill to require auditing of government gold reserves, in an attempt to finally answer the question “Is there really any gold in Fort Knox?”. Mooney is well-known in hard asset circles for his work in trying to get precious metals exempt from Federal income taxes.
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At the recent meeting of G-7 nations in Britain, French president Macron urged wealthy nations to sell some of their gold reserves to fund $100 billion in aid to Africa. This would be used for mass vaccination programs and medical care, among other things. He seems to be the only one enthusiastic about his proposal.
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Koreans raced to buy gold in early June, as inflation surged to a nine-year high of 2.6%. Food was up 12% and petroleum products up 23%. In one example, the CEO of a medium-sized company in Seoul dropped $1.26 million on 18 gold bars in one transaction.
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Indian gold imports fell from 70.3 tons in April to only 11.3 tons in May. This was due to lockdowns and mass deaths from COVID ravaging the country. Gold dealers were offering the deepest discounts in 9 months in an attempt to drive sales.
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Gold prices in China also fell to a discount, as large-scale lockdowns resumed due to the “delta” strain of COVID. This wasn’t a problem in April, as Chinese gold imports hit 111 tons. This was 73 tons more than March, and 106 tons higher than last April – but the entire nation was under strict lockdown back then.
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Gold production in AUSTRALIA nearly stopped completely in June, due to COVID outbreaks at several gold mines. The “delta” COVID virus has sent cases spiralling out of control, resulting in lockdowns affecting more than half the country’s population.
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After bitter negotiations, NEVADA has implemented higher taxes on gold and silver miners operating in the state. Excise taxes of 0.75% will be levied on miners with gross revenue from $20 million to $150 million. Firms grossing over $150 million will be taxed at 1/1%.
These taxes will not violate legislation that caps taxes on net proceeds of miners to less than 5%. The extra revenue is earmarked for improving Nevada’s education system.
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CENTERRA GOLD has had to file for bankruptcy for its Kyrgyzstan branch after the huge Kumtor gold mine was seized by the Kyrgyz government. The government has refused to negotiate on the matter, leading to the bankruptcy proceedings.
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Increasing frequency and lengths of power blackouts by the state-run power company in SOUTH AFRICA is sharply curtailing precious metal mining production.
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The Inspector General of Police in GHANA has pulled police from guard duty on bank bullion vans after the deaths of several police officers. The banks are using regular vans to transport gold, leading to out of control attacks on them by bandits. One such armed robbery took place in front of a police headquarters. The Inspector General said that police protection for bullion transfers would not resume until the banks purchased proper armored cars.
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An ex-DEUTSCHE BANK gold trader was convicted of gold price manipulation by placing spoofing offers. A second convicted DB trader is awaiting sentencing.
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STANDARD CHARTERED called $1770 as the new level of hard support for gold in June. This is holding mostly true.
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Did the Feds swindle Pennsylvanian treasure hunters out of $4 billion in Civil War gold? The Associated Press and Philadelphia Inquirer convinced a judge to unseal 2018 FBI warrants where the agency seized state-owned land in Pennsylvania to search for 26 buried Civil War gold bars that were lost in 1863 when a Federal detachment was attacked.
The Feds were acting on the work of Dennis and Kem Parada, a father/son treasure hunting duo, who had narrowed down the possible location of the gold After interviewing the Paradas, the FBI obtained the warrant to seize the land.
A contractor hired by the FBI discovered underground signals that were probably from a large amount of gold. This touched off several days of excavating by the Feds. In the end, the FBI said that they didn’t find anything. Despite that, they have never filed a written report of whether they did or didn’t find the lost Civil War gold.
The Paradas believe that the FBI did recover the gold, and are trying to swindle them out of their share. The state of Pennsylvania is probably thinking the same thing, as the gold was on state-owned land.
Looking Ahead To Next Month
Gold will be hypersensitive to Non-farm Payrolls and Fed talk in July. Summer is supposed to be the doldrums for the gold market, but this is nothing near a normal year.
Biden is pushing a bipartisan infrastructure bill that doesn’t raise taxes, but neither the real conservatives or real progressives are happy with it.If it gets through the Senate the increase in spending may dampen dollar strength.
Energy analysts are speculating on whether Saudi Arabia can keep the OPEC+ coalition from breaking production agreements. Russia is very unhappy, and wants to pump a lot more. If they all hold the line, we might see $100 oil later this summer, which is going to push inflation higher.
This month’s treasure story has a real historic feel to it. King John of England, who was forced by the barons to sign the Magna Carta, was in the middle of quashing a large rebellion when the English Crown Jewels and most of his treasure was lost while crossing an estuary.
800 years on, a local gentleman thinks he has found the famous lost royal treasure.
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