October 2015 – Week 1 Edition

Gold rose $35 in two hours on Friday, from 8:00 am to 10:00 am, Eastern Time, due mostly to the downbeat jobs report, released at 8:30 am.  Gold held on to most of its gains Monday morning.  As of Friday morning, gold was suffering its biggest weekly decline in seven months, falling to $1,104 overnight, just ahead of the jobs report.  Economists had expected over 200,000 new jobs to be added in September, but the number came out at 142,000, along with massive downward revisions to the previous two months.  From this, pundits assumed the Federal Reserve may not raise rates this year, extending gold’s “even playing field” with near-zero short-term Treasury interest rates for another few months.

Third Quarter U.S. Mint Gold Sales Eclipsed the entire First Half of 2015

Demand for physical gold and silver was phenomenal in the third quarter, which ended last Wednesday. The number of Gold American Eagle ounces sold by the U.S. Mint rose 181% over the second quarter, while silver sales rose 47%.  The Mint sold a total of 397,000 ounces of Gold American Eagles in the third quarter – or 45% more than the 273,000 ounces they sold in the first SIX months of 2015. 

The Mint sold 14,268,500 ounces of Silver American Eagle coins in the third quarter – a 29-year record high – vs. just 9,715,000 ounces sold in the second quarter of the year.  This increase came about despite rationed sales in September. The Mint put a cap of one million ounces on sales in the first week of September, then 819,500 ounces in the second week and 750,000 the third week. Despite those limits in distribution – and a declining price in silver throughout the quarter – sales rose 47% in the last quarter.

Dealers continue to experience delays in delivery, but this can rebound to the benefit of rare or common-date numismatic coins.  When customers see high premiums on bullion coins, they often see the benefit of accumulating numismatic coins, which many are available immediately at premiums not that far above the bullion-based American Eagle and other newly-minted coins from other global Mints – including the Royal Canadian Mint and Perth Mint – which are also experiencing high and rising investment demand.

In addition, gold is up in terms of many other currencies, outside the U.S. dollar.  In the first nine months of 2015, for instance, gold is up 39% in Brazil, up 21% in Turkish lira terms, up 12% in South Africa and up 7% in Canada and Mexico.

Major Central Banks Continue Buying Gold

In August – the latest month for which statistics are currently available – at least two central banks bought more gold. The People’s Bank of China bought 16 metric tons of gold in August, bringing its official gold holdings to 1,694 tons.  Also, the Central Bank of the Russian Federation bought nearly twice as much, 31 metric tons – its highest one-month purchase since March and fourth largest in recent history.

It’s interesting to note that both of these nations were America’s two biggest enemies in the Cold War and both nations are flexing their muscles on the world scene: Russian forces have recently been deployed in Syria, and China is defending its disputed properties in the South China Sea, while engaging in alleged cyber-warfare, piracy of copyrighted property, currency manipulation and other financial shenanigans.

China is also making an attempt to be the gold trading center of the world.  Transfers from Switzerland (a traditional gold trading center in Europe) to China are part of the global gold migration from the West to the East.  China is also absorbing much of the gold sold by U.S. ETF traders.  Sales in the new Shanghai Gold Exchange (SGE) exceed trading volumes at any other global gold market. Over 65 metric tons of gold were withdrawn in the week ending September 25, making a year-to-date total of 1,958.7 tons, an annual rate of nearly 2700 tons – which represents about 90% of the newly-mined gold totals this year.

South African Gold Mining Strike Looms

It’s getting harder and harder to find significant quantities of gold in South Africa.  The leading mining firms must drill down over two miles underground to find new veins.  They construct costly tunnels and air cooling systems, ventilation and safety supports to upload the ore – which may contain only a few grams of gold per ton of ore.  Then they must pay the workers an increasing amount of salary and benefits. For that reason, the declining gold price has made mining South African gold much more costly than it was just five or 10 years ago.  Workers won’t compromise on salary and benefits, so it is increasingly likely that South Africa will have to close some of their mines down soon.

Bloomberg reported last week that “African gold production could be shut down or sharply curtailed soon as a strike threat loomed larger when the second-largest union in the country rejected a pay offer even after the largest union approved it.”  The Association of Mineworkers and Construction Union (AMCU), which represents 31% of gold mine workers, called the offer “pathetic,” even though the main union, The National Union of Mineworkers (NUM), which represents 52% of the miners, earlier accepted the offer. 

Bloomberg also reported that “the largest producers in South Africa with the deepest mines that are among the oldest in the world are losing money on about 35% of production at current gold prices. Even though AMCU is not the largest union, it claims the greatest clout as it controls the fate of three of the largest producers – AngloGold, Sibanye Gold Ltd. and Harmony Gold Mining Co.” If AMCU goes on strike, they say that “there will be no production coming out, even if these other unions do not do so.”

Any reduction in South African gold production would put additional pressure on the supply of new gold.

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