The following column is authored monthly, by Steven Cochran of Gainesville Coins.
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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 September?
Gold was very price sensitive in September, mostly to the downside. Gold saw only muted responses to good news, and overreacted to bad news. Major headwinds included higher bond yields, a stronger dollar, and a growing concern that higher inflation will last longer than central banks said it would.
Gold’s five-session streak of prices above $1,800 ended on September 7, when prices crashed $35 an ounce.
The middle of the month saw a slew of economic news come in far better than expected, sending gold down $55 in three days. This pushed prices temporarily below the important $1,775 line of support. Gold bounced between $1,775 and $1,750 for the next week.
The last few days of September saw gold attacked from all angles. Global fuel shortages sent prices of natural gas and coal to new records, forcing some factories to shut down and rolling blackouts to be instituted.
This also fanned the flames of stagflation fears, as the energy crisis meant higher consumer prices at the same time as economies slowed down. Yields on Treasury notes zoomed higher, making them a more attractive safe haven for gold, while overseas investors dumped their native currencies for dollars.
In the first 15 minutes of trading on the 28th, the yield on the 10-year Treasury note jumped from 1.485% to 1.539%, crushing gold prices to $1,727. Gold recovered somewhat, closing at $1,734.
On the 29th, the dollar skyrocketed from 93.72 to 94.39, a 2021 high. This smashed gold down more than $14 for the second consecutive day, with spot gold ending at $1,726. Precious metals got a reprieve on the last day of the month, as bargain hunters stepped in. This helped prices rally $30 to back above $1,755/oz. Gold still closed out September with a loss of -3.2% for the month.
Factors Affecting Gold This Month
GLOBAL ENERGY SHORTAGE
Europe and the UK paid the price in September for dumping too many regular power plants too quickly. Droughts caused hydroelectric dams to stop working, and an unusually mild summer in northern Europe.
Record energy prices will feed into higher inflation in all sectors of the global economy. There’s even a global coal shortage, with Eastern Europe being forced to ship coal all the way from Australia.
One part is all the mines and refineries that were shut down due to COVID work stoppages. Another part is the opposite: economies rebounded sharply in 2021, catching energy producers flat-footed as low gas and coal prices shot to records.
A big part is the failure of renewables to pull their share of the load. Catastrophic droughts put hydroelectric power stations down for the count, perhaps for years to come. In Europe, the usually high winds off the North Sea slowed to a light breeze too weak to turn windfarm turbines.
US ECONOMY
The latest Nonfarm Payrolls report was a disaster. Only 235,000 new jobs were created in August, while experts expected 720,000 new jobs. Gold jumped straight up and closed at an 11-week high of $1,833.
The next Monday, gold crashed $35 an ounce to end just below the key $1,810 mark. This set up $1,780 as next support. Gold’s inability to break above $1,840, even with the disaster of a NFP report, exhausted bulls and emboldened the bears.
The Fed’s Beige Book survey of economic conditions for August showed that economic growth was slowed by the new wave of delta COVID hitting dining, travel, and tourism; high prices and limited supply of housing; and microchip shortages halting most automaking.
The end of the “fiscal stimulus” checks weighed on consumer spending. The GDP forecast for September began the month at 5.3% and ended at 3.2%. Recent reading for U.S. GDP in the second quarter clocked in at 6.7%.
Producer prices increased by 8.3% in August, the largest increase on record. Consumer prices rose 5.3% year to year.
NOT-SO-TEMPORARY INFLATION?
The Fed’s assurances that rising inflation was “transitory” began ringing hollow during September. By the end of the month, Chairman Powell was saying that it’s “frustrating to see the bottlenecks and supply chain problems not getting better — in fact at the margins apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought.”
Core PCE, the Fed’s preferred inflation gauge has been at 30-year highs for two months running.
Across the Atlantic, Eurozone inflation for August set a ten-year high of 3%. ECB President Christine Lagarde acknowledged that the economic recovery in Europe was progressing faster than they expected six months ago.
Some are warning that exceptionally high energy prices are causing factories to reduce output or temporarily close altogether. This combination of inflation and economic slowdown caused by high energy prices is what causes stagflation.
BOND YIELD REVERSAL
The 10-year Treasury yield moved from about 1.3% to above 1.5% in the span of a week. The sell-off in bonds would appear to signal higher inflation expectations.
DEBT CEILING BATTLE
This year’s version of the annual debt ceiling showdown may cause a government shutdown. This would force the Fed to delay any tapering of QE until economic volatility calmed down.
STOCK MARKET PEAKING?
On September 8th, Morgan Stanley, Citigroup Inc. and Credit Suisse Group AG all cautioned investors on the outlook for U.S. equities. Citing “outsize risks” to growth through October, Morgan Stanley slashed American stocks to underweight and global equities to equal-weight.
EVERGRANDE
China’s second-largest real estate developer is struggling to make debt payments. Despite efforts by the Chinese government to contain the damage, this revelation sent shockwaves throughout global markets, but they are expected to be short-lived. Rather than a contagious collapse along the lines of Lehman Brothers in 2008, the potential spillover effect of Evergrande’s default (or restructuring) is likely to be buoyed by a bailout from the CCP.
Fed Actions
September’s FOMC meeting revealed some interesting thinking by the Fed. The statement that tapering QE would begin “soon” was no surprise, but the Dot Plot showed that a majority of senior Fed officials on the committee see the first interest rate hike happening next year, instead of in 2023. The Fed now expects annual inflation for 2021 to come in at 3.7% (3% formerly), and annual GDP at 5.9% instead of 7%.
Chairman Powell told reporters that a “reasonably good” Nonfarm Payrolls report on October 8th would be the sign to start tapering. He also said he expected the taper to be finished by the middle of next year.
Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan both announced their sudden retirements of September 27th. By the time you read this, Rosengren has already flown the coop, and Kaplan will be gone on Friday October 8th. Both were caught trading stocks in individual companies, with advance knowledge of Fed policy.
Central Banks
Also on the “corrupt central bank officials” subject, the leader of the International Monetary Fund is facing calls to resign after it was discovered that while at the World Bank, she pressured subordinates to falsely inflate China’s ranking in a benchmark report. The Chinese government then made a multi-billion dollar contribution to the World Bank’s operating fund.
The EUROPEAN CENTRAL BANK announced a “don’t call it a taper” taper on September 9th. They said that they would be buying fewer bonds per month going forward, but would buy the same total amount of debt. Unlike the Fed, the ECB put a cap on its COVID rescue program. It’s just going to take a little longer to get to the end now.
The central bank of NORWAY became the first central bank in the developed world to hike benchmark interest rates, with an increase of 25 basis points.
BRAZIL’S central bank raised rates 100 bp (1%) for the second month in a row to 6.25%. It said it will do it again next month. Brazil is fighting a 9.3% inflation rate that is only getting worse after major coffee and corn crop failures.
In other central bank news, the TURKISH central bank has re-entered Bizzaro World by CUTTING interest rates by 1% to 18%. The Turkish lira tanked hard on the move, which was ordered by President Erdogan. He believes that easier money will stop inflation, when what it really does is make inflation worse. The 19.25% inflation Turkey is suffering from is only going to get far worse.
Central Bank Gold Purchases
This month’s central bank gold reserves report covers the month of July. A net 30.1 metric tons of gold was purchased by the world’s central banks in July. Brazil was the largest buyer, at 8.5 tons. This comes a month after the huge 41.8 tons of gold they purchased in June. Over just 90 days, Brazil purchased 62.2 tons of gold.
Uzbekistan bought nearly as much gold as Brazil this month, at 8.4 tons. India entered the market in July, adding 7.5 tons of gold to its reserves. Kazakhstan bought 1.5 tons of gold, a month after dumping nearly 20 tons on the market. Mongolia bought 1.1 tons of gold in July. After being absent from the market for a while, the Russian central bank added 3.1 tons of gold.
Qatar (2.2 tons) and Poland (1.9 tons) were the only central banks with sales of note in July.
The head of POLAND’S central bank reaffirmed the nation’s intention of building up its gold reserves. He told reporters that “Gold is the ‘best reserve’ of our reserve assets. It diversifies political risk and is sort of an anchor of confidence, especially in times of tension and crisis.”
Gold ETFs
The world’s gold ETFs saw assets under management (AUM) fall by a net 22.4 metric tons in August. This was the fault of large gold ETFs in the United States, where a stronger dollar and higher bond yields early in the month spooked gold investors.
North American gold ETFs saw 32.2 metric tons of outflows in August, worth $1.8 billion. In contrast, European gold ETFs saw inflows of 9.6 tons ($550 million), Chinese gold ETFs added 0.8 tons ($39.7 mn), and “Other” nations saw a net loss of 0.5 tons ($30 mn).
Global holdings of gold ETFs stoof at 3,611 tons ($221bn). This is the lowest total since May.
Dollar and Forex
The dollar weakened during the first part of September, but gained strength starting the third week of the month.
The USD hit its year-to-date high of 94.43 on September 29th, compared to its 52-week low of 89.2.
On The Retail Front
The US Mint bullion sales remain robust, but came in lower in September than August. 99,000 ounces of Gold Eagles and Gold Buffaloes, and 2,735,000 ounces of Silver Eagles were sold in September.
If the US Mint can sell another 4.4 Silver Eagles in the next two months, it will beat last year’s 30 million and make a five-year high. Gold sales are practically guaranteed to break 2016’s 1.2 million ounces and set the highest sales totals since before the Great Recession.
The Perth Mint sold 53,976 ounces of gold and 1,467,229 ounces of silver in August. It also saw a record pre-tax annual profit of $56 million (AUD) in fiscal 2020. The Mint returned $41 million in taxes and dividends to the state government of Western Australia.
Market Buzz
Gold imports by INDIA hit a 5-month high in August, of 121 metric tons. This is almost double last August, but that was when gold shot up to $2,000 dollars an ounce.
These imports come against a backdrop where poor people have to sell their gold to get by during COVID lockdowns, and rich people snap up everything they can. According to a major jewelry retail company, people have been panic buying gold since July.
CREDIT SUISSE says that the failure of gold to hold the $1,775 level increases the odds of prices falling all the way to $1,691. Actually, it was more than Credit Suisse. Nearly every large bank said the same thing.
SOCIETE GENERALE notes that inflows and outflows in gold ETFs continue to call the shots on the direction of the gold market.
In a “man bites dog” situation, CNBC’s Jim Cramer told his viewers on September 14th, “Right now, you’re better off keeping some cash, owning some gold.”
Ray DALIO said in an interview “I have more gold than crypto”, noting that if bitcoin gets too successful, “the government will kill it.” We saw this actually happen in China this month.
The Deputy Minister in charge of mining development in NIGERIA wants gold smugglers to face the death penalty.
Looking Ahead To Next Month
The beginning of a new quarter leaves an abundance of questions about the next step for the precious metals markets. Any slumps near $20/oz for silver and $1,700/oz for gold will likely be met with strong dip-buying. Fiscal uncertainty in the U.S. and whether or not the Chinese markets orchestrate a “soft landing” will loom large — for precious metals as well as the broader markets — through the early part of October.
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