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 August?
Gold held above the $1,800 mark to start August, until an unexpectedly bullish Non-Farm Payrolls report on Friday the 6th and an orchestrated flash crash on Monday the 9th combined to send gold down almost $100. Gold prices slowly ground higher as the month went on. $1,750 was reached, then $1,780 later on.
Gold got a $25 boost on Monday the 23rd, which propelled it back above $1,800. Profit-taking on the 25th brought prices down nearly $15, setting up a battle in the $1,790–$1,800 range.
Gold ended the last full week of August with a solid $24 gain on Friday the 27th. This propelled prices to $1,819 an ounce. Silver gained 51 cents the same session, to close above $24 an ounce for the first time since the flash crash in precious metals on August 9th.
This late jump in prices was thanks to Fed Chairman Jerome POWELL indicating that they would start tapering the world’s largest monthly bond buying program by the end of the year, but that it would be a gradual process.
Factors Affecting Gold This Month
US ECONOMIC RECOVERY
A usually dull August was shaken up early, when a blowout Non-Farm Payrolls report was released on the 6th. 943,000 new jobs were created in July, and the unemployment rate fell to 5.4% from 5.9%. This was far beyond what anyone expected. The huge numbers were seen as putting heavy pressure on the Fed to taper quickly.
Consumer inflation was a big surprise to the upside once again in August. The CPI rose 0.5% over last month, and 5.4% on an annual basis. Inflation has been over the Fed’s 2% target since March, and over 5% since May.
The Personal Consumption Expenditures (PCE) price index hit a 30-year high of 4.2%. The PCE is the Fed’s preferred gauge of consumer inflation. Many market watchers consider this as fulfilling Fed Chairman Jerome Powell’s “above 2% for an extended time” condition for tapering QE.
Wholesale inflation as measured by the Producer Price Index hit a new high on an annual basis, showing an acceleration of 7.8% to the cost of manufacturing goods. This follows the gain of 7.3% the previous month, which was a new record high itself.
All the crazy good economic reports had Wall St bracing for the Fed to announce at any time that it was tapering its monthly bond buying. The release of the July FOMC minutes on August 18 sent taper fears into high gear. It revealed that “most participants” thought that it was appropriate to begin tapering this year.
The explosion of Delta-variant COVID cases worldwide quickly turned an inflation scare into a growth scare. China partially shut down its third-largest port due to a COVID outbreak, throwing global shipping into confusion and delay. This impacts the economies of most other nations, as the lack of goods (and parts to make goods) creates shortages and slows down manufacturing.
TOKYO declared a state of emergency over the tsunami of COVID infections, even while the Olympics were in progress. The mayor of Tokyo called the situation “out of control.”
Half of AUSTRALIA remained under lockdown in August, with Army troops called in to enforce curfews. Despite such draconian measures, COVID cases continue to increase.
The spread of Delta COVID in the US in August was worse than the original wave. This explained the sudden collapse in CONSUMER SENTIMENT. Economists expected the reading to remain unchanged. Instead, they got a massive drop from 81.2 to 70.2.
The introduction in the actual report called it “a stunning loss of confidence in the first half of August.” Over the last 50 years of the monthly survey, a drop this large has only been seen six times. All of these instances foretold a sudden negative economic change.
The US received a bit of good news on the COVID front on August 23rd, as the FDA gave full approval to the Pfizer COVID vaccine. This removes its “experimental” status and makes it a regular treatment. It is hoped that the FDA’s approval will ease the minds of people afraid of getting an experimental treatment, leading to more vaccinations.
GOLD FLASH CRASH
An incredibly bullish Non-Farm Payrolls report on Friday the 6th pounded gold a staggering $45 lower an ounce. Stops were blown out in one long cascade of selling. Gold futures fell from $1,808 to $1,763. This chased more than two TONS of gold out of the SPDR Gold Trust in a single day.
Big gold banks and hedge funds smelled blood in the water. With markets in both Japan and Singapore closed for holidays, volume would be extremely thin. Once Asian trading opened Monday without two major markets participating, manipulators went for the kill.
$4 BILLION of gold was dumped on the market and absolutely crushed gold prices. Gold instantly dropped $80 lower to $1,684, before recovering half that by the end of the day. Spot gold settled “only” $33 lower than the Friday close, ending Monday at $1,729.
Dollar and Forex
Despite full hospitals and disruptions caused by the new COVID wave, the US is still top of the heap when it comes to economic recoveries. Other major economies are not faring so well. The resulting softness in their currencies has increased safe haven demand for the dollar.
Nearly constant bullish taper talk from various Fed officials in August also strengthened the dollar, lifting it to highs for the year late in the month.
The full approval of the Pfizer vaccine by the FDA on the 23rd ended the string of YTD highs for the greenback, sending it on a downward path for the rest of the month. It’s still beating the stuffing out of all other major currencies, though.
There were a lot of Fed officials who wanted to see QE tapered ASAP this month. Dallas Fed president Robert KAPLAN continued making his rounds on TV, calling for tapering to be announced at the next FOMC meeting in September, and the taper to begin in October.
Kansas City Fed president Esther GEORGE and Cleveland Fed president Loretta MESTER agreed with Kaplan’s timeline, with Mester adding that she wanted the Fed to be completely out of the bond market by next summer.
Boston Fed president Eric Rosengren and Fed Board of Governors member Christopher Waller want the taper to start NEXT MONTH with no delay. Waller said that the Fed needs to “go early and go fast.”
Chicago Fed president Charles Evans was not a fan of such a sudden move, saying that we needed to see how things shake out with Delta COVID choking the economic recovery. Atlanta Fed president Bostic agreed with Evans, saying the country needs to be “well beyond” the COVID crisis before raising interest rates.
The “taper team” changed their tune after a collapse in consumer sentiment and industrial activity. Kaplan modified his taper demands after the reports, saying that the Fed should wait to see if the economic downturn eases as COVID is brought under control.
The question was finally answered on the 27th, when Chairman Powell announced that tapering would begin before the end of the year. He softened the blow by reaffirming that the Fed would go slow, with an eye on inflation.
The ECB says it will allow inflation in the EU to overshoot 2% for however long it takes to get it to stick. Eurozone inflation is running an average of 2.2% right now.
The BANK OF ENGLAND kept the benchmark interest rate at 0.1%, and stood pat on its QE purchases. The Bank predicts that the current surge in inflation is temporary, and will come down by the end of the first quarter next year.
The TURKISH CENTRAL BANK once again defied their strongman President by refusing to cut interest rates. Erdogan keeps firing central bank leaders that try to tell him that higher interest rates FIGHT inflation, not cause it. Inflation in Turkey is running at 18.95%. (No wonder people are literally selling their cars to buy gold.) The central bank’s target inflation rate is 5%.
NEW ZEALAND’S central bank put on hold plans to hike interest rates, as new cases of COVID appeared in the island nation.
Central Bank Gold Purchases
This month’s Central Bank Gold Report from the World Gold Council covers the month of June. All told, a net 32 tons of gold was purchased by the world’s central banks. This was mostly due to BRAZIL going large, and buying 41.8 tons of gold, offsetting all the selling from other banks.
Other buyers included INDIA (9.4 tons), POLAND (1.2 tons), and UZBEKISTAN (5.3 tons).
KAZAKHSTAN was a big surprise in the other direction. The Central Asian nation has been a regular buyer of gold for the last few years, but dumped 19.8 tons on the market in June. The other big seller was TURKEY, which is trying to stabilize its currency and get a grip on a 19% inflation rate. They sold 6.8 tons of gold in June.
Overall, physical gold ETFs saw a net 11.1 tons of inflows. North America and Europe traded roles in July, with inflows seen in Europe (17.1 tons), and outflows in North America (7.2 tons). This could be attributed to the hot stock market in the US on one hand, and the ECB reassuring investors that easy money policy would continue on the other.
Marginal Asian gold ETF inflows of 1.0 ton for July was supported by China, where state-induced pressure on the stock market drove demand. The “Other” category saw only a paltry 0.3 tons (300 kg) of net inflows, underpinned by 400 kg of inflows to Australian gold ETFs.
Global Assets Under Management (AUM) of gold ETFs stood at 3,636 tons ($214 billion). This is 7% below the all-time high of 3,909 tons reached last October.
On The Retail Front
Investors flocked back to United States gold bullion in August, buying 117,500 ounces of American Gold Eagle (which now has the Type 2 reverse), and 23,000 ounces of American Gold Buffalo bullion coins. That’s a combined 140,500 ounces of US gold sold in August, and puts the YTD total over 1 million ounces!
American Silver Eagles had a good month as well. 3,180,000 ASEs (which also have a new Type 2 reverse) were sold in August, pushing the YTD total solidly over the 20 million line. 22,190,500 Silver Eagles have been sold so far this year.
The PERTH MINT sold 56,104 ounces of gold bullion in July, an increase of 26.4% from June, and +160.7% year-to-year. Silver bullion sales for the Perth Mint totaled 1,567,900 ounces. This was down marginally from June, but still 58.9% higher compared to last July.
BARRON’S got the call right on silver this month, saying that at the start of the month that they saw prices falling in the next several weeks. Silver lost two and half bucks in August, falling to $23 before catching a late bounce. Let’s hope that their prediction for this autumn is also correct, since they’re calling for a double-digit percentage rally for silver.
CPM GROUP expects the current market for precious metals to improve, saying that they are “in the foothills” of a rally that should play out over the next several years.
HSBC predicts that institutional selling in the gold market will be countered by retail investors buying the dip. The bottleneck to retail sales will be in fabrication. Manufacturers cannot keep up with demand for investment bars and coins.
GERMANS are on a gold-buying frenzy again, as people fear that a Fed taper and rate hikes will “export US inflation” to Europe.
The WORLD GOLD COUNCIL reported early this month that this may be “an opportune time” to prepare for a September gold rally. The WGC also notes that gold has risen an average of 15% in years where annual inflation exceeds 3%. The US is running at an annual inflation rate of 5.37% right now.
Large data analytics company PALANTIR announced it has made $250 million in investments in various tech companies in its latest earnings report. Oh, and it also bought $50.7 million in 100 oz gold bars, as insurance against future “black swan” events.
The company notes that it owns the bars outright, and is storing them with a major vaulting company. They can take possession of the gold at any time, by giving reasonable notice to the vault company.
Fifty years ago this month, President Richard Nixon took the world by surprise by removing the link between the US dollar and gold. The “Nixon Shock” destroyed the fixed exchange rate regime set forth by the 1944 Bretton Woods agreement.
Gainesville Coins market analyst and commentator Everett Millman described the Nixon Shock, and what that meant for gold prices.
Looking Ahead To Next Month
The stock market has shaken off every bad thing that has happened this year. But if record-setting cases of COVID continue, it will hit corporate earnings, and that’s the only thing Wall Street cares about. If stocks go into a correction, bond yields will fall back down to new lows, and gold will see greater safe haven demand.
This month, we have some “local” news from the American Redoubt. There’s a gold prospecting hobby group in Northwestern Montana that gets together once a month at Libby Creek to pan for gold. The group chips in to rent a dredger for the day to have fresh dirt to pan, and just get together and have fun.
If that sounds fun to you too, contact the Northwest Montana Gold Prospectors, at http://www.nwmtgoldprospectors.com/membership.htm
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