Precious Metals Month in Review, by Steven Cochran

Welcome to SurvivalBlog’s Precious Metals Month in Review, by Steven Cochran of Gainesville Coins. Every month, we’ll take a look at the “month that was” in precious metals, covering everything from price action to the information that’s driving the numbers.

January in Precious Metals

December closed on the usual down note as the last bit of tax-related selling went through, but January started off strong, as the big commodities index funds had to buy gold to meet new percentages. The index rebalancing only added fuel to an oversold gold market, as the price jumped $30 in 48 hours. Part of the reason for gold’s very good month may have been more people realizing that the stock market and real estate were in a bubble, with even National Public Radio running pieces on the QE-inflated stock market. In a Fox Business interview, Peter Schiff put to words the unease that many may be feeling about the phony recovery when he said, “We have a lousy economy, and the Fed is patching it by creating inflation.” “We are spending all this money that the Fed is creating. That IS inflation… if the Fed were ever to do the right thing, and let interest rates go up, and shrink its balance sheet, the market would implode.

On January 6th, someone tried to stop gold’s rally by selling 400,000 ounces worth of gold contracts in the space of ONE second. It only had a temporary effect though, as the market had rallied even higher two days later, into the high $1,240s level. Violence in Thailand, Egypt, and Syria lend safe haven support to gold. Mining companies began releasing reports around this time for the fourth quarter of 2013, showing increased production and level expenses. This was/is from a practice called “high grading,” where the miners are only working the purest veins in order to recover a higher amount of gold per ton of ore processed. This reduces expenses per ounce of gold mined in the short term, but it lowers the overall life of the mine. When no “good” ore is left to mix in with the low grade ore, the mines become unprofitable and are shut down, leaving the low-grade gold in the ground.

By January 17, gold prices were at a five-week high of $1,254/oz. This was the same day that Deutsche Bank, the largest bank in Germany, announced that it was the subject of an investigation by Germany’s highest regulator into currency, gold, and silver manipulation, and that it would be quitting its involvement in the London Gold Fix. The London gold fix is a twice-daily conference call between five of the world’s largest banks, where they “fix” the benchmark rate of gold. This benchmark is used in trillions of dollars of transactions, including hedge funds and gold purchases by central banks. The president of Bafin, Germany’s top regulatory agency, said that the manipulation in currency rates and gold may be larger than the LIBOR scandal.

On January 23, strikes in South Africa against the platinum mining companies began, halting production of 70% of global platinum supply. Prices weren’t affected much, as the mining companies had stockpiled six weeks of above-ground ore. More important for gold that day was Pakistan banning gold imports for 30 days. This was the second time since August it had done this to prevent the outflow of dollars from its economy. Of the four metric tons of gold imported into Pakistan in the last six months, more than 25% of it was smuggled into India. This caused gold to post its biggest one-day jump in three months, hitting a two month high of $1,279, and closing at $1,270/oz.

Another big story in January was the news that Germany only repatriated five tons of gold from the Fed in all of 2013, and that the bars were melted down and recast by the Fed before they were given to the Germans. Germany only got 35 tons back from France, which is less than six hours away from the Bundesbank’s vaults in Frankfurt.

In the last week of January, citizens in Cyprus rioted at the headquarters of the Bank of Cyprus, demanding their money back after they were “bailed in” against their will. This group of over 8,000 people have been trying since November 2012 to get their money back.

The last week in January also saw money pouring out of emerging market economies ahead of the FOMC meeting, as Indonesia, India, Brazil, South Africa, and Turkey, among others, saw their currencies hitting multi-year lows. Even Russia was caught in the currency devaluation as foreign investors scrambled for dollars to bring money back home. Combined with a high-yield “trust fund” in China almost defaulting and setting off a chain reaction, investors had had enough and pulled out. This caused a big safe haven demand for gold, which spiked to a 10-week high of $1,279/oz. This all contributed to the safe haven demand gold saw this month.

Another factor was the demand in Asia ahead of the Chinese New Year on January 31st. Asian demand was high, but not quite as high as expected. This may have been because buyers went bargain-shopping on the $1,186 low in late December.

As expected, the Fed reduced its monthly quantitative easing program by $10 billion, meaning that “only” $65 billion would be created from thin air to buy bonds and mortgage-backed securities from Wall Street banks in February. This put more pressure on the emerging market economies, who were just last year complaining that the U.S. was conducting a “currency war” against them by flooding the market with money. Now that the money spigot is being closed, their economies, which had become dependent on the Fed’s liquidity, are suffering withdrawals.

The month closed out with central banks in India, South Africa, and Turkey making emergency rate hikes to stop runaway devaluation of their currencies. This helped the situation enough for panic to ease. Consumer-fueled fourth quarter GDP in the U.S. showed 3.3% growth, which helped Wall Street break a losing streak and spark profit-taking in precious metals.

Market Buzz

Indian Finance Minister, P. Chidambaram , said on January 27, that the easing of restrictions on gold imports into the country would be reviewed at the end of the fiscal year on March 31st. Any action would be conditioned on how far the reduction in the Current Account Balance has progressed. The government is under increasing pressure to ease the draconian restrictions on importing gold to what has traditionally been the world’s largest gold consuming country.

On CNBC, Peter Schiff declared, “The Fed is trapped; buy gold now.” While the Fed did taper this month, Schiff’s assertion that it has no exit strategy and will have to continue at least some money printing may very well prove true (just before interest rates rise enough to prevent the Federal government from making interest payments on the debt.)

Eric Sprotttakes a look at the April gold take-down and the explosion of physical demand the paper manipulators didn’t expect. He runs the numbers and shows that if the Indian government hadn’t enacted extreme restrictions on gold imports, global demand would have outstripped all supply.

Our good friend at the Perth Mint Bullion Blog have an article on how “Gold Can Never Be In A Bubble,” a thought-provoking piece that’s well worth the read. Also, I take a look at the mainstream media’s MOPE over how China is holding a record $1.3 trillion in U.S. debt and at putting it into perspective. If we’re told that the world economy will explode if China tries to sell off its U.S. debt holdings, how are we supposed to believe that the Fed can unwind a substantially larger balance sheet?

On the Retail Front

Speculators in London and New York may not think gold and silver are worth holding, but everyday people on the street sure do! The Royal Mint ran out of 2014 gold Sovereign coins two days after launch, and sold suppliers that it would take until the end of the month to restock. The U.S. Mint sold over 3 million American Silver Eagles the first two days of sales, and rationed them for the entire month. Since the Mint had two extra weeks this year to make the initial stock of Silver Eagles, some wonder if it was a government-mandated ploy to prevent another record-breaking January for the popular bullion coin. January 2012 sales topped 6.1 million coins, and January 2013 sales hit 7.49 million before the Mint ran completely out.

Speaking of the U.S. Mint, it reported that profits on bullion sales more than doubled in 2013, up 108.8%. An all-time record of over 42.6 million Silver Eagles were sold before supplies were cut off on December 9th, and nearly 1.1 million ounces of gold bullion Eagles and Buffaloes were sold. The Perth Mint in Australia reported working three shifts in an attempt to meet gold and silver demand. Gold sales for 2013 were up by 41% and silver sales were up by 33%.

In Russia, Nomos Bank ,a major private bank, revealed that it had purchased close to 100 metric tons of gold and nearly 400 metric tons of silver to sell to its customers through its branch offices. Japan’s largest bullion dealer reported that gold sales were up 63% in 2013, as Japanese citizens prepare for the Abenomics QE designed to raise interest rates to 2% in two years. If they can stop inflation rising and not overshoot their target, they will be the first central bank to ever pull that off.

Looking Ahead

February will start out slow for gold, as Asian demand will be soft after the spending spree for Chinese New Year. The U.S. stock market hasn’t seen a real correction in over two years, so is past due, especially after a Fed-fueled 30% gain last year. In the short term, the two major factors that would cause a run on gold is the emerging markets resuming a meltdown and China’s “shadow banking” crisis blowing up into a Lehman Brothers-type event. Western analysts are warning that the Chinese government has likely made things worse by bailing out the “Credit Equals Gold” high-yield trust, which reinforces expectations that the PBOC will ride to the rescue and make all investors in risky loan deals whole.

Indonesia carried out its ban on the export of unprocessed ore, despite the shortage of refiners. That means that 4% of global gold production has just been halted. On top of the requirement that all ore be refined in-country, the government is slapping a 20% tax on exports. The mining companies have flat refused to pay it, and have halted production. This is a huge deal in copper, nickel, and tin. Rising prices in these base metals will help silver and the platinum group metals.

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