The financial world has turned its attention to gold. Gold has flirted with $2,000 an ounce, and silver has reached $26, before corrections. Meanwhile, as the mainstream press is urging the public to stay away from gold, the U.S. Mint announced it would be shutting down some of its production. But that’s perhaps not even the biggest news out of the precious metals markets.
That might be reserved for Sprott announcing they may raise $1.5 billion dollars to invest in tens of millions of ounces of silver. The total number could approach 10% of annual global mining production.
Also surprising, silver shorts only added 1800 contracts on this move as of the July COT report. “That is highly unusual,” David Morgan told me. “You don’t see that very often. I have seen it in the past where we get what I consider to be a runaway market for awhile. The professionals basically don’t go short into it, which 90% of the time they do. In these instances they stand aside, they let the retail buyers––though there are some professional traders––burn out, they’ll buy it at $22-25 and at $26 it subsides. At that point the market exhausts temporarily, and at that point they come in and short the heck out of it and drive the price down.” And then, on July 29, in a breath-taking 15-minute swing, silver fell to $23.50 as nearly 60 million ounces swung.
There’s more…After having shut down production at certain facilities amid the spring coronavirus lockdowns, the U.S. Mint has now reduced the volume of gold and silver coins sent to authorized purchasers. The Mint’s West Point complex in New York has said the coronavirus measures will slow coin production for between 12 and 18 months.
“The pandemic created a whole new set of challenges for us to manage,” the Mint said in a document seen by Bloomberg. “We believe that this environment is going to continue to lead to some degree of reduced capacity as West Point struggles to balance employee safety against market demand.” The U.S. Mint had already slowed production in March.
The Mint is asking dealers to provide 10-day and 90-day forecasts for demand for the first time in history so it can determine what products to make. The Silver Institute earlier this month forecasted 7% decline in mine production for 2020.
Meanwhile, the mainstream media is telling the public to “stay the hell away from gold,” as Forbes.com Senior Contributor Larry Light wrote.
“Unless you are a deft in-and-out commodities trader, which not many people are, or a long-term investor, which you should be, then gold is a problematical holding,” he wrote. “Certainly in any large amount.”
He added: “Alas, that damn volatility means that, once the bad times are past, gold will drop like the heavy rock it is.”
Stocks are a better inflation hedge, he wrote. “In the fullness of time, investing in this precious metal is buying fool’s gold,” he wrote.
CBS News evoked Warren Buffett, who has long warned investors against gold, calling those who do, even in times of uncertainty, “foolish.”
An India-based CNBC affiliate, furthermore, tried to implore its readers against buying physical gold and instead nudged them towards digital gold. The report argued that physical assets are at risk of “being lost or taken away.” It pushed its readers towards digital gold.
“The storage and security cost of a physical asset is higher as compared to digital gold, which makes the digital route a superior alternative. There is transparency in prices as it tracks current market gold prices and no concerns with regards to theft or storage,” explains Anurag Jhanwar, co-founder and partner, Fintrust Advisors LLP.
Professor Arvind Sahay, chairperson, India Gold Policy Center, IIM-Ahmedabad, said ‘’Digital Gold’ allowed people to own gold coins, bars and jewellery online.
The U.S. Mint is cutting production, and the mainstream press is maligning gold, as the yellow metal reaches a peak of $1,975 on Tuesday as the dollar fell to a two-year low. With the dollar falling since May, it has fallen even further amid doubt about the coronavirus recovery, and declining yields leading buyers into precious metals. Investors expect the Federal Reserve would continue stimulus by the end of the week and perhaps tolerate higher inflation.
After a dramatic price increase on Monday, a wave of selling in after hours trading led to a decline to $1,940––still above its $1,920 record reached in September 2012. Gold is up about $125 in just over the last week.
Aside from the dollar’s decline, the coronavirus lockdown is the driving force behind the gold rally. When gold posted last Friday its seventh weekly gain, and stood at $1,902.02 per ounce, it was 30% higher than the low of March.
The case for gold remains strong. The prospect of further government lockdowns; unprecedented stimulus packages; a plunge in inflation-adjusted bond yields into negative territory; and the dollar’s fall against the euro and yen, as well as rising US-China tensions.
Some are concerned over the possibility of stagflation, which is a combination of sluggish growth and rising inflation that undermines the value of fixed-income investments.
Investors expect annual inflation over the next decade, according to a bond-market metric known as breakevens, which have moved higher the past four months after plunging in March. They hit last Friday 1.5%, which is a full percentage point higher than the 0.59% yield that benchmark 10-year Treasury bonds pay.
Edward Moya, a senior market analyst at Oanda Corp, says the main driver behind gold’s latest rally “has been real rates that continue to plummet and don’t show signs of easing anytime soon.” Gold is attracting investors who are “concerned that stagflation will win out and will likely warrant even further accommodation from the Fed.”
Gold is also a hedge as yields on Treasuries fall below zero. Gold-backed ETF holdings are headed for an 18th straight weekly gain, which marks the longest streak since 2006.
“When interest rates are zero or near zero, then gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold,” Mark Mobius, co-founder at Mobius Capital Partners, told Bloomberg TV. “I would be buying now and continue to buy.”
Bank of America Corp. raised in April its 18-month gold-price target to $3,000 an ounce. “The global pandemic is providing a sustained boost to gold,” Francisco Blanch, BofA’s head of commodities and derivatives research, said last Friday, highlighting impacts including falling real rates, growing inequality and declining productivity. “Moreover, as China’s GDP quickly converges to U.S. levels helped by the widening gap in Covid-19 cases, a tectonic geopolitical shift could unfold, further supporting the case for our $3,000 target over the next 18 months.”
In recent history, stimulus has led to increased gold and silver prices. From December 2008-June 2011, the Fed bought $2.3 trillion of debt and held borrowing costs near zero. Silver went to $49 in April 2011 and gold to $1,921 in September 2011.
Afshin Nabavi, head of trading at Swiss refiner and dealer MKS PAMP Group, was not surprised by gold’s ascent to $2,000.“This time, to be honest, I do not see the end of the tunnel,” he said. Perhaps the U.S. elections would serve as a reprieve to the gold run, he said.
“Fed officials have made clear that they will be making their forward guidance more dovish and outcome-based soon,” wrote analysts at TD Securities.“The chairman is likely to continue the process of prepping markets for changes when he speaks at his press conference.”
Gold stocks have performed well, too. For instance, Australia-listed shares of AngloGold Ashanti increased as much as 40.1%. Australian Miners BHP Group and Rio Tinto increased 2.3% and 4.6%, respectively. This and other mining increases has led the metals and mining sub-index to a nine-year high.
At present, investors are assessing whether gold and silver prices increased too high, too fast as the dollar recouped some losses. “This is the highest high and in every time zone the traders have been trying to push it higher and higher,” said Brian Lan, managing director of Singapore-based dealer GoldSilver Central Pte. “You see the strength wasn’t there. They were trying to try a few more times and a correction is due. So probably you might see some profit-taking already.”
Gold’s 14-day relative strength index has been above 70 for six days. Some traders see that it is overbought and due for a pullback. Spot silver increased more than 6% to the highest since April 2013 before falling 2%, and was trading 0.2% lower at $24.50.
Silver prices are at their highest levels in approximately seven years. Silver gains are outpacing the rest of the bullion complex with silver futures increasing to as high as 2.4%––their highest since August 2013.
Amid a weakening dollar, geopolitical tensions, falling real rates, and governments and central banks worldwide have conducted stimulus measures to try and boost economies. “Debasement of the U.S. dollar, the more negative real rates, and you’ve still got lingering uncertainties around geopolitics and the U.S.-China relationship,” said Wayne Gordon, executive director for commodities and foreign exchange at UBS Group AG’s wealth-management unit. That combination of things is what’s pushing gold higher, he said.
“The message from the Fed meeting is expected to be dovish, reiterating the need for more fiscal measures, which is likely to be supportive of gold,” said Nicholas Frappell, global general manager at Sydney-based ABC Bullion. “With real interest rates deep in negative territory and the coronavirus resurgence hitting the dollar index hard, that’s good for gold.”
Inflows into gold-backed exchange traded funds were higher than the record set in 2009 and silver holdings are near an all-time high. Citigroup Inc. recognizes that silver is likely to increase in the scenario with which we are faced: an increased desire for wealth protection, and fears of inflation-induced wealth destruction. These factors will likely increase prices over the coming the next six-to-12 months, predicting prices to $30 by mid-2021, according to analyst Aakash Doshi. Considering silver’s recent move, this prediction strikes us as too conservative.
“Those people who probably missed out on the gold rally jumped on the silver idea as a similar idea to hedging against the depreciation of the dollar and real interest rates going deeper into negative territory,” said UBS’s Gordon. “Silver has a volatility relative to gold of about double gold’s volatility, so from a hedging, safe-haven perspective, we still prefer gold.”
Morgan says we’re seeing the early stages of the next bull market. “We had to get silver above $19.50 and the ratio had to get back down to 80 to 1,” he said. “How high will it go and how fast? It may come on faster than I originally thought.”
For July, silver is up +30%, and gold is up +8%. July 29, furthermore, was the seventh day in which gold price traded over the Bollinger band, which are envelopes plotted at a standard deviation level above and below a simple moving average of the price.