February 27, 2021

August 2020 in Precious Metals, by Steven Cochran

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. This column by Steven Cochran is courtesy of Gainesville Coins

What Did Gold Do in August?

August was a volatile month for gold. Early in the month, gold extended a series of new all-time record highs that began on July 24th, when spot gold closed at $1,901.30 an ounce. Gold closed above $2,000 for the first time on August 4th, at $2,019.40. Prices hit the current all-time high of $2,063.20 an ounce on August 6th.

At this point, gold had set new all-time highs nine times over the last ten trading days. Spot gold had rallied for 17 out of 19 sessions from July 13th, to August 6th, going from $1,801 an oz to $2,063 an oz.

This spurred talk around our office that gold was overdue for a correction. The excuse for that correction showed up the next day.

The nonfarm payrolls report for July was released on August 7th, showing more new jobs than expected were created. Stocks rose on the good news. It also gave support to the US dollar, which had been at two-year lows. Spot gold fell $28 from its record high that it had scored the previous day. Treasury yields rose, as investors cycled into risk-on assets..

August 11th saw the largest dollar-wise daily loss for gold in seven years, as President Vladimir Putin shocked the world with the announcement that Russia had developed a COVID vaccine. Putin declared that the vaccine was safe, and that mass inoculations would begin in October.

The prospect that the global COVID epidemic might end before the end of the year sparked an abandonment of safe-haven assets of all types. Spot gold fell $118 an ounce to $1,910.00. This would be the monthly low. December gold futures fell $93 an ounce, but would not see its monthly low until August 25th.

Gold ground its way back to $2,000 by August 18th, before selling off to $1,946 over two days. Spot gold spent the last week of August fighting a $45 losing streak as it tried to avoid ending lower for the month.

Spot gold as tracked by XAUUSD lost 7% in August. This follows an 11% gain in spot gold prices in July, which was the largest monthly rally since 2012. Year to date, gold was 29.7% higher by August 30, and 28.88% higher year over year.

Most of the correction in gold prices that we saw in the last half of August were from speculators taking profits, and “weak hands” that bailed at the first sign of a correction.

Many gold market analysts agree that all markets will suffer from increased volatility at least through the end of the year. This makes daily swings of more than $100 more likely.

Factors Affecting Gold This Month

FED POLICY AND REAL YIELDS
Fed policy, and how it affects real interest rates, is still a major factor in gold prices.This was especially true in August. Fed Chairman Jerome Powell’s August 27th speech announced a major policy shift for the Fed.

The old policy used falling unemployment as a sign to preemptively raise rates before inflation actually rose. Acknowledging that this policy hasn’t worked since the 2008 Global Financial Crisis, Powell said that the Fed would now follow a policy of “Average Inflation Targeting.”

Going forward, the inflation rate will be allowed to run higher than 2% “for some time” to make up for the years it spent under 2%. In the meantime, the Fed will concentrate on lowering an unemployment rate that has more than doubled during the COVID epidemic. Gold rallied to $1,987 an ounce on the news.

This rally was snuffed out and gold quickly fell $72 as Powell later added that the Fed would quickly step in if inflation rose too quickly over 2%. Gold later rebounded slightly to close around $1,930.

The Fed will continue to keep interest rates near zero, while buying Treasuries and corporate bonds. This will send real interest rates deeper into negative territory as inflation picks up. This will provide major support for gold prices.

COVID (Again)
The world is still pinning its hopes on a coronavirus vaccine that will allow economies to return to normal. The market reaction to the surprise (but premature) announcement that Russia had developed a vaccine that was ready for human use shows how much of a game-changer a vaccine will be.

Safe haven assets like gold will be pressured once economies open back up, unless the threat caused by unlimited central bank money printing and yield suppression is noticed by the stock market.

CHINA TENSIONS (Again)
Things are heating up between the US and China, as the Trump administration takes steps to stand up to Chinese spying in the US, suppression of democracy in Hong Kong, and aggression against its neighbors.

Spying: Trump has cracked down on Chinese espionage by “college students” and scientists who often brazenly spy on US military installations and steal scientific secrets.

Hong Kong: China has increased its suppression of Hong Kong, suspending elections and cracking down on “disloyal” speech. In return, the US has imposed sanctions on numerous Chinese and Hong Kong officials for suppression of guaranteed freedoms of Hong Kongers.

Taiwan: Emboldened by its success in Hong Kong, the Communist government in China has stepped up military provocations against Taiwan. They are hoping that someone on the Taiwan side makes a mistake and gives China a reason to invade. The US is increasing the number of voyages of US Navy ships through the Taiwan Strait to show its commitment to defending the island.

South China Sea: In a major escalation aimed at China’s seizure of shoals and reefs in the South China Sea and converting them into military bases, the US blacklisted 24 Chinese companies and targeted a number of individuals involved in the construction and militarization of these artificial islands. This puts them on the same list as drug traffickers and terrorists, locking them out of international financial markets that use the US dollar.

DOLLAR WEAKNESS
The weak dollar provided a tailwind for gold prices as they smashed the all-time high set in August 2011. The DXY dollar index was stuck at two-lows for most of the month, weighed down by ballooning government debt and unprecedented money printing by the Fed. Evidence early in the month that European and Chinese economies were doing better than the US also put pressure on the dollar.

A weaker dollar makes gold more affordable in other nations, while boosting the price in the US. In this sense, the gold rally in the US is finally catching up to the rest of the world, where gold has been setting all-time records for months.

CENTRAL BANK ACTION
Gold prices were pulled from all-time highs by the Fed’s actions in August. FOMC minutes and speeches by various Fed officials indicated that yield curve control is no longer being considered (for now). As gold market expert Jan Nieuwenhuijs noted earlier in the month, any sort of yield curve control would send real interest rates deeply negative. This would be jet fuel for gold prices.

It’s not just the Fed that is making “the money printer go brrrr,” like the popular meme. Nearly every major central bank is not only monetizing their government’s debt, they’re buying corporate bonds of companies that don’t need help getting loans at low rates, like WalMart, Exxon, and McDonald’s.

“We’ve not seen this level where central banks are printing money at a zero interest rate. At zero interest rates, gold becomes a very, very attractive asset class,” Frank Holmes, CEO of US Global Investors said.

Gold ETFs

The World Gold Council’s Gold ETF report for July shows that global gold ETFs extended all-time highs yet again in July. Inflows totaled 166 metric tons of gold, valued at $9.7 billion. This was the eighth consecutive month that ETFs registered monthly gains. July’s inflows extended the all-time high for assets under management (AUM) to 3,785 metric tons, valued at $239 billion. Year to date, total gold ETF inflows have reached 889mt ($49bn).

Once again, North American gold ETFs dominated, bringing in 118mt of new investment, worth $7bn. This was an increase of 5.5% of AUM. Next was Europe, with 40mt of inflows, valued at $2bn. This increased European gold ETFs holdings by 2.1%.

Gold ETFs in Asia came roaring back in July, seeing twelve times June’s total. Investment increases in July totaled 4.9 metric tons, compared 0.4mt in June. This was an increase of 5.6% AUM. “Other” gold ETFs increased holdings by 3.4mt,for a 5.5% increase in total assets.

The world’s largest physical gold ETF is SPDR Gold Shares (GLD). By itself, it had 63 metric tons of inflows in July alone. This boosted AUM to 1,241.6mt, more than the holdings of the Swiss central bank!

(Please note that the ETF report in last month’s column was reported as July’s numbers, instead of June.)

Lawrie Williams of Sharps Pixley thinks that the recent heavy media coverage of gold breaking all-time highs multiple times this month may be encouraging more small investors to buy gold ETFs. He calls this the Robinhood Effect, as the “bored at home millennials” pile into the next hot thing.

Central Bank Gold Purchases

The World Gold Council reports that central bank gold reserves grew by 233 mt in the first half of the year, but purchases are expected to slow as central banks fight recessions in their countries caused by the COVID pandemic.

Central bank gold reserves are reported two months in arrears. This month, we’re reviewing central bank moves for June. Turkey once again dominated a quiet month. Most major central banks were pouring trillions of dollars into stimulus programs in June, trying to prevent the collapse of their economies from COVID lockdowns. This meant that they had little money to spare for gold purchases.

The Turkish central bank purchased 22.2mt of gold in June. This was followed by Kazakhstan, reversing a recent selling trend. The Kazakh central bank added 5.8mt to the nation’s gold reserves. The Czech Republic was the only other gold buyer in June, buying 1.2 metric tons.

Colombia (-8.8mt) and Mongolia (-2.3mt) were sellers.

Speaking of the Turkish central bank, Turkey is expected to produce a record 44 metric tons of gold this year. The Turkish central bank has the right of first refusal on gold mined in Turkey, and is expected to buy all of it.

In other news, the Reserve Bank of India announced that it had added 26.4mt to its gold reserves between February and June. Rumors are circulating that the Indian central bank is going to sell US Treasuries and dollars, and accelerate its gold purchases later this year.

Silver

Silver was the big winner in August, building on July’s gain of 25%. As of August 30, spot silver was up another 13%. Year to date, silver gained an incredible 58%.

American Silver Eagles were still being rationed by the US Mint in August, even though both the San Francisco and Philadelphia Mints were helping the West Point Mint with bullion production. Their stated objective was to double ASE production from 200,000 a week to 400,000 a week.

The shortage kept premiums on Silver Eagles higher than normal. To be fair, premiums remained higher for all silver bullion in August, but demand still outstripped supply.

The gold:silver ratio dropped from 83 to 70 during August. This compares to a gold:silver ratio of 126 this March. This illustrates how silver is beginning to catch up to gold. Some metals analysts see this as a sign that silver has more room to rally.

The CEO of Wheaton Precious Metals, the dominant precious metals “streaming” company, looks for silver to hit $50 an oz if the current economic environment holds.

On The Retail Front

The Perth Mint reports that they sold 56,104 troy ounces of gold in July. This was 26.4% higher than June, and 160.7% higher than last July. Year to date, sales of Perth Mint gold coins and bars is 189.5% higher than last year. Sales of silver coins and bars totaled 1,567,900 troy in July. This was down marginally from June, but 58.9% higher than July 2019. Year to date, Perth Mint silver sales are 90.9% higher than at the same time last year.

In contrast, the US Mint sold 145,500 troy oz of gold and 1,084,500 ozt of silver in July. Silver sales were constrained by the Mint rationing silver bullion coins, as they could not keep up with demand.

Year to date, American Gold Eagle and Gold Buffalo sales have cumulatively already hit a four-year annual high. American Silver Eagles through August are at a three-year annual high.

On the futures front, we learned that COMEX July gold futures saw the largest “stand for delivery” on record. 3.27 million oz of physical gold had to be delivered by sellers of August gold futures.

Falling bond yields and rising inflation in India pushed gold imports in July to a five-month high. This was in spite of high domestic prices. Year over year, imports were 37% higher.

The continuing fall in the Turkish lira to historic lows had Turks doing everything they could to move their wealth to US dollars and gold. Turks were withdrawing their life savings to buy gold.Some were even selling their cars to buy more gold. Retail gold purchases in Turkey totalled $7 billion dollars just in the first two weeks of August.

Speaking of retail sales, we’d like to remind everyone to NEVER buy coins or any other sort of precious metal from cold callers. Someone recently bought $70,000 worth of gold coins from someone making an unsolicited telemarketing call. All the gold coins he received were counterfeits. Always know who you’re buying from! This is why we also discourage people from buying gold coins or bars on Craigslist. The same goes for eBay, unless it’s from a known dealer with a real physical presence.

If you do decide to risk buying gold or silver from a pawn shop or online ad, please know how to test for counterfeit gold coins and fake gold bars.

Market Buzz

Credit Suisse said this month that the secular bull in gold remains intact after August’s roller coaster ride, but they see the possibility of a lengthy consolidation phase in the short term. They mark $1,837 as support. Long term, they mark resistance levels at $2,075, $2,175, and $2,300.

VanEck’s Joe Foster says that we could eventually see $3,400 gold, if this bull market echoes the 2009-2011 rally.

Commerzbank notes that stocks hitting new all-time highs late in the month is keeping a lid on gold prices in a tight $1,920/$1,900 range.

CITI sees gold hitting $2,100 in the near future. They say that negative real rates and a weaker dollar give gold a real shot at $2,300 over the next 12 months.

RBC reminds people that gold started the year at $1,520. Hitting $2,000 so quickly means greater volatility going forward.

DeGussa sees gold averaging $2,550 a year from now, and silver at $48.

Hedge fund Bridgewater Associates snapped up $340 million worth of gold ETF shares in the second quarter, a regulatory filing shows. This brings their total gold holdings up to $1 billion.

Warren Buffett’s decision to buy 21 million shares of Barrick Gold stock was a surprise to everyone. Buffett has long been someone who has called gold “useless.” The decision to spend $564 million on the world’s largest gold miner has many fund managers reassessing the importance of gold to their portfolios. Buffett is famous for his “buy and hold” investing strategy, which means he sees long-term value in Barrick.

Chinese speculation in gold futures this month gave new meaning to the term “irrational exuberance.” This led Chinese regulators to order banks to stop letting people buy precious metals futures.

Goldbug Corner

Christopher Wood, global head of equity strategy at Jefferies, warns that the economic destruction of the COVID epidemic may force emerging market nations such as India and Saudi Arabia to sell their gold reserves in the near future.

Jim Rickards is predicting gold hitting $15,000 an oz by 2025.

Peter Schiff believes that the record levels of central bank gold purchases will continue until the rest of the world has enough gold to topple the US dollar as the world reserve currency, and reinstate a Gold Standard.

Can we put GOLDMAN SACHS in the Goldbug Corner? If they keep saying things like this, maybe these ideas will go mainstream! Goldman analysts say that there are “real concerns around the longevity of the dollar as a reserve currency” due to the current environment of governments debasing their currencies and pushing real interest rates to all-time lows (read “deeply negative”).

Looking Ahead To Next Month

Some Israeli teenagers helping at an excavation in central Israel discovered a sealed clay pot filled with 425 pure 24kt ancient gold coins. The 1,100 year-old coins represented an incredible sum at the time. Archaeologists overseeing the work say that the 1,100 year-old coins represented an incredible sum at the time.

The kids who discovered these 9th-Century coins will keep only their memories of the find. Like anyone else in Israel that finds ancient treasure, they will get NOTHING, except a literal certificate of appreciation from the government. Does anyone at all wonder why so much of this stuff ends up on the black market?

This column is intended for educational purposes only. It is not intended as investment advice.

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