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 hit a 4 1/2 year low of $1,131 an ounce in the first week of November, then posted three straight weeks of gains to the $1,200 level. The rally was snuffed by the November 27th OPEC meeting, where oil production was maintained at its current levels. The resulting crash in crude oil futures pulled the currencies of oil-producing nations down and boosted the dollar. Since energy costs make up a large part of inflation, crashing crude oil prices pulled gold downward.
Silver was pulled to multi-month lows on November 5th, along with gold, closing at $15.32/oz. It recovered later in the month to hit a closing high of $16.67 on the 25th.
Precious Metals Market Drivers in November
The story of the month could be summed up as “Flying Dollar, Crashing Oil.” The U.S. and the U.K. seem to be the only two major economies with their sea legs in a storm of volatility and disinflation.
The economic month really started on November 6, when non-farm payrolls fell 16,000 short of expectations. Unemployment was reported to have fallen to 5.8% from 5.9%, but the “real” unemployment numbers are at 11.5%. (The Labor Department now pretends that you don’t exist if you’ve been unemployed for too long.) The gains were in retail and hospitality– sales clerks, bartenders, and hotel maids. Those are real quality jobs, there. (Not!) Nearly 7 million people are stuck in part-time jobs, and sometimes in more than one, in order to make ends meet.
David Stockman explains why the employment numbers are a sham in his article “The Fed’s Paint-By-Numbers Delusions About The Labor Market.”
Despite new records in the stock market, more and more people “in the know” are worried about an impending crash. DeutscheBank sees a higher probability of economic turmoil ahead than the probability of an upside to current conditions.
Kansas City Federal Reserve president Esther George is finally getting some allies in her common-sense analysis of the bubbles in real estate and equities.
If some of your family or friends don’t believe that there is a stock market bubble, show them this Bloomberg article that shows that Apple is worth more than the entire Russian stock market.
The big worry this month in Europe and Asia are deflation and recession. After China announced stimulus measures, the European Central Bank said it would be boosting inflation as soon as possible, Japan fell into recession, and the financial press has been all about deflation. David Stockman notes: “No, the problem in Europe is not too little inflation in the short-run; it is staggering levels of taxes, public debt and interventionist dirigisme that represents a permanent, debilitating barrier to growth.”
MEXICO UNREST
Protests in Mexico continue, as federal officials openly show their disdain for the citizens and more corruption is exposed at the highest levels of government. Could we be seeing the start of a “Mexican Spring” that will clean out corrupt and brutal police and bring down politicians on the take? Perhaps we’d see fewer illegal immigrants, if they weren’t scared that the police would execute them for protesting the conditions that they live in.
INDIA
Despite an ever-increasing crackdown on gold smuggling in India, illegal gold continues to flood the market. The government of Bangladesh reported this month that seizures of gold shipments being smuggled into India increased by 100 times this year. In India, October saw a 17-month high for gold imports into the country, as over $4 billion worth of the yellow metal was brought into the country (legally) during the month. This obviously doesn’t include the amount of gold smuggled into India, which has been on the rise this year with the introduction of an unprecedented 10% import duty on gold, along with other restrictions intended to curb imports and cut the government’s trade deficit. Gold consumption in India through the end of October this year has surpassed the totals from all of 2013. Plummeting oil prices gave the Modi government some leeway to pleasantly surprise the people at the end of November, when it suddenly scrapped the “80:20 rule” that forced gold importers to have 20% of all gold they brought in, made into jewelry and sold overseas before being allowed to import more.
MANIPULATION
There was lots of manipulation news in November. JPMorgan Chase, CitiBank, Royal Bank of Scotland, UBS, and HSBC agreed to pay a total of $3.3 billion in fines between them to regulators in the U.S. and U.K. to make currency manipulation charges go away. The Feds have warned the other banks to take advantage of a “bank amnesty” and come forward to admit currency market manipulations by December, or else.
CitiGroup, which is the world’s largest currency market participant, was kicked out of the ECB currency group for manipulation.
In addition to rigging forex trades, Switzerland’s largest bank, UBS, has also admitted to misconduct in the precious metals market after being caught at what Swiss regulators called a “clear attempt” to manipulate precious metals benchmarks.
MF Global (or what is left of it) settled claims of manipulation of the platinum and palladium markets to the detriment of its clients, and a new lawsuit was filed in New York claiming that HSBC and Goldman Sachs did the same thing.
DeutscheBank, after admitting months ago that it was under investigation by German authorities and dumping its base commodities business, decided the heat was too much and went ahead and closed its physical precious metals operations. They will still remain eyeballs-deep in the “paper gold” market of futures and derivatives, however.
BANKS CONTROLLING THE FED
The revolving door between the New York Federal Reserve and Goldman Sachs caught a banker in the butt this month, as Goldman Sachs fired a banker who had brought secret Fed documents with him when he was hired by the “too big to jail” bank. This probably would not have happened, except that the secret tapes by Fed investigator Carmen Segarra were made public, which showed Fed supervisors telling investigators to ignore illegal activities by Goldman Sachs.
New York Federal Reserve President and former Goldman Sachs chief economist William Dudley found himself unable to sway a Senate panel that everything was fine regarding his agency’s oversight of Goldman Sachs.
With a history of a revolving door for employees between the “too big to fail” bank and the New York Fed, Congress is closer than ever to passing legislation to force the Fed to clean up its act. Politicians on the right and left may unite to strengthen laws to reverse the “regulatory capture” (infiltration of an agency by the entities it is supposed to regulate) that many see Goldman Sachs exercising over the NY Fed.
If successful, this could mean actual prosecutions against bankers for market manipulation, instead of the “pay and fine and not admit guilt” practice now in effect. Beltway insiders say that there is little chance of any such law passing, however.
November 19 treated us to a blatant market manipulation around noon, flushing stops in both direction using leaked Swiss gold referendum poll numbers as excuse. Gold and silver were driven drastically down. The “players” then waited for a while for new stops to be initiated, then shot the prices back up to make money on both sides.
The “Flash Boys” (high-frequency traders who use computer programs to make thousands of manipulative trades in a second, then cancel them) have started taking advantage of thin Asian gold market volumes around Chinese lunch hour to manipulate gold prices. It has become so bad that even Reuters has noticed.
REPATRIATION
The Dutch did it, the Germans apparently can’t, and the Swiss might. They may repatriate their gold, that is. The Dutch National Bank shocked the precious metals markets this month when they announced that they had pulled 122.5 metric tons of their gold out of the NY Fed. This accounts for 20% of the total national gold reserves of the Netherlands, and it reduces Dutch gold held in New York from 51% to 31%.
It didn’t take but a day or two for the right-wing Front Nacional political party in France to demand a total audit of French gold reserves, including the serial number of every single bar, and also demand a study to decide whether to repatriate gold reserves held overseas.
On November 30th, the Swiss vote on a gold repatriation referendum that will essentially put the nation on a 20% fractional gold standard.
NEGATIVE GOLD FORWARD RATES
Gold forward rates (GOFO) are the interest rate someone pays to borrow dollars, while using their gold as collateral. This is a common practice for short-term financing. When the GOFO turns negative, it signifies a shortage of physical gold. Instead of people paying interest to borrow dollars, they are paying interest to borrow gold (with the expectation that they can buy more gold to pay back the loan before the due date.) This usually signifies a shortage of readily-leaseable physical gold in New York and London. We have seen a deepening GOFO rate, even out to six months. Current GOFO rates are at 14-year lows.
The huge physical gold outflows from the West to Asia since the big price drop in 2013 is reducing the amount of gold in the West. The situation is being exacerbated by economic sanctions against Russia for their seizure of Crimea. Mining companies in Russia are unable to export their gold to the West, so the Russian central bank is buying it up to keep them in business.
While this Russian gold may come back into the market in the future, it is doubtful that any of the gold sold to Asia will be seen in Good Delivery trading warehouses again.
On The Retail Front
The U.S. Mint had a happy Halloween, selling 1.4 million ounces of silver American Eagle coins that day. This was the highest daily sales since January 13th, when the new 2014-dated coins first became available. Annual Silver Eagle sales are less than 1.3 million from second annual record in a row, even through supply was rationed from January to July, and supplies ran out on Nov 5 and did not resume until Nov 17.
The Royal Canadian Mint recently had to put Silver Maple Leaf coins on allocation (rationing). Although sales for the third quarter were down from last year, at 5.4 million coins, 20.8 million were sold in the first three quarters. The RCM only reports bullion sales in their quarterly report, which means a lag in sales figures.
Gold demand in China through Hong Kong is up 2.9% this month, marking the third month in a row of increases. Most of this was jewelry, as Hong Kong is the favorite place for mainland Chinese to buy gold jewelry. Gold bars are increasingly being brought into China via Shanghai, or directly into Beijing, to avoid the eyes of the West. Hong Kong’s reporting methods, a legacy of their history as a British colony, are more transparent.
Market Buzz
Dubai’s unique weight loss contest, where citizens earn physical gold based on how much weight they lose, ran into a problem this month. The government ran out of enough gold to award the winners! Extra coins were ordered, and the award ceremony has been rescheduled for next month.
The terrorist army of ISIS had Western media eating out of their hand again this month, as they announced that they would be minting “Islamic State” coins in gold, silver, and copper. CoinWeek had an editorial explaining why this is just a bunch of bull.
Former Fed Chairman Alan Greenspan has been getting a lot of attention over his positive statements about gold recently. Even CNBC covered his quote that gold is going “measurably higher.”
Here’s a clip from the interview:
INTERVIEWER: But do you think that gold is currently a good investment given what you’re saying about the potential for turmoil?
GREENSPAN: Yes. Economists are usually perfect in equivocating. In this case I didn’t equivocate. Look, remember what we’re looking at. Gold is a currency. It is still by all evidences the premier currency where no fiat currency, including the dollar, can match it. And so that the issue is, if you’re looking at a question of turmoil, you will find, as we always have in the past, it moves into the gold price.
Here is the total transcript. (The part about gold starts about halfway down.)
Gold miners are in a hard place right now, as it is estimated that 75% of gold producers lose money at a spot price under $1200. These lower prices mean that some of the “in the ground” gold ore is no longer profitable to mine at these prices and have to be written off.
In the “could this happen here?” department, we find out that the people in Crimea STILL can’t get their money back.
Looking Ahead
By the time you see this on Monday, we’ll know whether or not the Swiss Gold Repatriation Referendum passed or not.
GoldCorp CEO Declares Peak Gold in 2015.
Analysts at Johnson Matthey estimate that the five month long miners’ strike in South Africa this year will cause the platinum supply deficit for 2014 to reach 1.1 million ounces.
Will ASEs make a new all-time record for the second year in a row, or will the U.S. Mint be ordered to resume restrictions on Silver Eagles to prevent the bad press for the Keynesians in the Fed?
Let’s end this month with the first part in a series of infographics from Visual Capitalist, on the looming problem of “Peak Population.”
Steven Cochran is the Senior Content Writer for Gainesville Coins