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.
The marketplace in October was focused on how fast the European Union economies were going down the tubes and how badly it would affect the U.S. economy. Ebola continued to dominate the news channels on TV, while a slump in oil prices squeezed oil-producing countries, from OPEC to Russia.
Gold fell to a monthly low on October 3rd of $1,191, to retest the double bottom hit in July and December of last year. After dipping more the next trading day in Asia, it recovered little by little through the month to hit a six-week high on October 21 of $1,255. Gold prices then softened into the Federal Reserve Open Market Committee, meeting on October 29, where it fell over $16 to end at $1,211/oz.
Silver had a volatile month, bouncing in a range between $17.00 and $17.70. Platinum and palladium saw any gains offset by concerns over a global economic slowdown. Both metals are used in catalytic converters for internal combustion engines, and platinum is used in the process to increase octane in gasoline at the refinery.
Economic sanctions against Russia and counter-sanctions by Russia against the West have pushed the European Union into another recession and dealt serious harm to the Russia economy. Capital flight from Russia, and a shortage of dollars and euros due to sanctions, has caused the Russian ruble to fall to all-time lows. The Russian central bank has spent over $20 billion in October trying to prevent the collapse of the ruble. These currency interventions have done little to halt the ruble’s slide, and economists are expecting Russia to stop trying to defend their currency and let the ruble float on the open market.
Russian president Vladimir Putin has cast the sanctions against his country imposed for his seizure of Crimea and support of pro-Russian rebels in Ukraine as a Western conspiracy against Russia. This has rallied public support behind the government, allowing it to weather the sanctions so far. Russians will put up with great hardship in the name of patriotism. Now, all Putin has to do is wait for winter to bring Ukraine and Europe to the bargaining table, since Russia is a major supplier of natural gas to Europe.
Russian sanctions have hurt the economies of the European Union, but Greece, Italy, Spain, and Portugal seemed determined to drag the entire European Union into deflation and recession in October. Spain, Italy, and Greece were all officially suffering deflation in September, according to reports released this month. October 16 saw a full-blown panic in the European bond market, as investors frantically dumped the sovereign debt of “the four sick men of Europe.” Greek bonds saw their yield spike 2% in just 48 hours.
Their problem stems from sharing a common currency with more fiscally responsible nations, such as Germany. This means that they are unable to devalue their currency in order to be competitive. With labor costs in Spain at €23/hr compared to €7/hr in Poland, where would you build your factory?
These deflationary pressures drove the euro currency to multi-month lows.
The middle of the month saw investors flocking for the exits in the stock market, as fears of deflationary contagion reached the U.S., and large players exiting the junk bond market fed these fears. Crude oil prices falling into a bear market as economic growth was predicted to stall only worsened matters. Investors fled into safe havens, such as gold and U.S. Treasuries, as stocks seemed to be in a substantial downturn, but then unsubstantiated rumors about Yellen’s optimism over the economy halted the panic.
A Federal Reserve official fired for insisting on prosecuting Goldman Sachs for illegal activities and market manipulation released secret tapes of her bosses at the NY Fed telling her to stop investigating Goldman Sachs, because they were afraid of repercussions. The President of the NY Fed, William Dudley, steadfastly denounced the tapes, saying that there was nothing wrong with the relationship between the NY Fed and Goldman Sachs.
Dudley was Chief Economist of Goldman Sachs for over 20 years.
Speaking of poor, innocent “too big to fail” megabanks, an October 21 report by CitiGroup estimates that fines against big banks for manipulating currency markets may total as much as $41 billion. UBS, the giant Swiss bank, turned stool pigeon on the other banks in return for having their fines reduced or eliminated.
The Federal Reserve Open Market Committee voted to end the bond-and-toxic-mortgage buying program know as QE3 this month. This third round of quantitative easing began in September 2012 and has swollen the Fed’s balance sheet to $4.48 trillion (with a “t”) dollars. Don’t expect that to go down soon, as the Fed voted to use the proceeds from maturing securities to continue to buy more from the TBTF banks and keep the total the same. This will continue until after the first hike in benchmark interest rates.
The Fed downplayed deflationary fears in its statement and said that the labor market was improving. This sent stocks down, precious metals down, and the dollar zooming. Former Fed chairman Alan Greenspan remarked on the Fed’s plan to unwind its balance sheet in the future by saying, “I don’t think it’s possible” to do so without negatively impacting the financial markets. He also called QE a failure, noting it “hasn’t been a success on the demand side for one fundamental reason,” Greenspan said. “What you’re basically seeing is an explosion of assets, an explosion of reserve balances, and that’s the only two statistics that are moving.” The only thing QE has done is boost the stock market, while the real economy has stagnated.
Anyone who thinks no one believes in silver or gold any more isn’t paying attention. Sales of American Gold Eagle bullion coins at the U.S. Mint were almost 60,000 oz. by the last week of October. The 59,500 oz sold in October beats September’s 58,000 oz, to make this month the second strongest for Gold Eagles this year. Sales of American Silver Eagles were over 4.36 million oz. In related news, the new security features on the Canadian Silver Maple Leaf have proven so popular that the Royal Canadian Mint put silver Maple Leafs and their new .9999 10 oz silver bar on “allocation” in October. (“Allocation” is a nice word that means “rationing”.)
It isn’t just savvy individuals that are buying up precious metals. Russia bought 1.2 million ounces of gold for its reserves in October. This is 37.2 metric tons of gold bought in one month, estimated to have cost $1.5 billion. It is the largest monthly purchase of gold by Russia since they defaulted on their sovereign debt in 1998. Russian gold reserves have almost tripled since 2005, to place Russian gold reserves as the sixth largest in the world.
Even though China is importing more and more gold directly into Beijing to hide shipments from prying Western eyes, Chinese gold imports through Hong Kong jumped to a five-month high last month.
The Indian government claims that gold smuggling has tripled this year. Between April and September of last year, there were 550 gold seizures, totaling 153 crore rupees or about $25 million. (A crore is a South Asian unit of measure equal to 10 million units.) This year, over the same period, there have been 1,780 seizures of gold at India’s borders, totaling 470 crore rupees (~$76.5 million). The festival season has been good this year, as gold demand in India jumped 450% for Diwali this year.
Former Fed Chairman Alan Greenspan was in the news this month, noting that the Chinese are right to hold gold, as fiat currencies are only backed by the issuing governments’ ability to tax.
The CEO of GoldCorp, one of the world’s largest gold miners, says that we will see peak gold next year. This isn’t someone blogging in their basement; this is one of the world’s top experts on gold mining giving this warning.
Speaking of mining, First Majestic Mining is holding back 35% of its silver production until prices rise. What would happen if more producers decided that they weren’t going to let Wall St. speculators dictate prices anymore, using paper contracts that they will never ask for deliver on?
The first poll tracking the November 30 “Save Our Swiss Gold” referendum is in, showing 45% in favor of Swiss gold repatriation and holding 20% of central bank reserves in gold. Central Bank officials say that the provision of not being allowed to sell any gold reserves turns makes it useless as an asset. If this measure is approved, watch for absolute mayhem in the gold market.
As the weather gets colder, watch for cracks to appear in the west’s resolve to continue sanctions against Russia. My personal bet is that we see Ukraine come to some sort of settlement before they all freeze to death, “encouraged” by German prime minister Merkel.
Speaking of Germany, watch for a fight between Germany, on one side, and the ECB, Greece, Italy, Spain, and France, on the other, about allowing the ECB to make outright Fed-style bond purchases. If the sanctions against Russia are lifted, the economies of the EU might recover on their own.
Wrapping up this month’s column, we find that being the willing servant of evil doesn’t always mean everything goes your way. After printing $4 trillion in money to give away to Wall St. banks, it seems that former Fed Chairman Ben Bernanke can’t get approved to refinance his house.
Steven Cochran is a Senior Content Writer for Gainsville Coins