August 2020 - Week 3 Edition
Gold Surges Past $2,000
Gold reached $2,012 on Tuesday morning, August 18. In last week’s Metals Market report, we predicted a correction after nine straight weekly gains, and we saw a huge $150+ drop, with gold briefly dropping below $1,900 on Wednesday as Treasury yields rose, based in part on a promising COVID-19 vaccine coming out of Russia. Gold’s strength is now clear from its quick near-$100 bounce-back since last Wednesday. The same goes for silver, which dipped from $29 to $25, but then recovered to $28 in short order, as the long-term fundamentals for both gold and silver remain in place: trillions of dollars in new debt and stimulus money, negative real interest rates and now rapidly-rising inflation.
Remember, rising gold and silver prices help bring hundreds of thousands of new buyers into the bullion and rare gold coin markets.
Our 2020 Gold and Silver Price Projections Were Too Conservative!
Our 2019 predictions were “right on” for $1500 gold, but our 2020 predictions were too conservative. Back in July 2019, we “boldly” predicted $18 silver by year’s end and $20 silver in 2020. We got the $18 silver within three months and then we got $20 silver by July 21 – then silver kept on rising to nearly $30!
As for gold, we predicted in January (in the Week 3 edition) that gold would reach $1,800 this year if Donald Trump won re-election, but gold would surpass $2,000 if a Democrat like Bernie Sanders or Elizabeth Warren won the election. Well, the election is still 11 weeks away and we have already seen $2,000 gold, so we were too conservative in our gold prediction as well. We had no way of forecasting the COVID-19 epidemic in January, so we relied on past election year trends as well as past impeachment attempts and global tensions. In 2020 hindsight, the printing of too many trillions of new dollars in response to the COVID-19 pandemic was the primary engine that pushed gold prices over $2,000.
July Inflation Grows at a 7.4% Annual Rate
The U.S. Dollar Index is down nearly 10% (-9.7%) in the last five months, due largely to the massive creation of trillions of new dollars in stimulus money and deficit spending by Congress, plus Federal Reserve liquidity for bank lending in the wake of the COVID-19 pandemic. In time, this is almost certain to fuel a new round of higher inflation and higher gold prices. The gold price rise has begun, and now the inflation rates have started to rise, despite the 2020 recession temporarily dampening consumer demand.
Last week, the Labor Department reported that the Producer Price Index (PPI) surged 0.6% (a 7.4% annual rate) in July. That was twice the economists’ consensus estimate of a 0.3% increase. That news was released last Tuesday. On Wednesday, the Labor Department confirmed that the July Consumer Price Index (CPI) surged at the same rate (0.6%), well above the economists’ consensus estimate of a 0.4% rise. The core CPI, excluding food and energy, also surged by 0.6%, the largest increase since January 1991.
Once the economy fully recovers, probably in 2021, all the new liquidity sloshing around in the system, should push prices rapidly higher, pulling the price of gold and silver higher, too. This underlines the role of gold and silver as a currency alternative to the eroding value of the U.S. dollar. The U.S. Treasury is clearly printing too much money and the U.S. is borrowing too much money, which is why the U.S. dollar is weak and international investors are fleeing the dollar in favor of other currencies, and in favor of gold.
Warren Buffett Switches from Banks to Gold
One of the most successful investors of the last 50+ years has always had an eye for value. The big headlines on Friday showed that the “Sage of Omaha” was unloading his long-time holdings in U.S. bank stocks and buying gold stocks. At the mid-point of each quarter (August 15 in this case), hedge fund managers are required to release their holdings to the SEC. We have usually reported any unusual moves in the gold market by these hedge fund managers. This time around, there have been more “first time” gold buyers than usual. For instance, Mason Capital Partners, Sandell Asset Management and Caxton Associates all initiated new positions in the SPDR Gold Trust, which has followed the price of gold by rising about 30% year to date. But there’s no question that the most outstanding rookie buyer in the gold market is Warren Buffett.
Buffett bought just under 21 million shares of Barrick Gold, which was worth just under $27 a share as of June 30. Those shares rose $3 (+11%) on record-high volume Monday morning this week, so maybe the news that Buffett is buying this particular gold stock has caused the Wall Street mob to follow his lead.
To make room for his gold purchase, Buffett sold bank stocks including JPMorgan and Wells Fargo, and airline stocks including United Airlines and American Airlines. The switch from bank stocks is notable because Buffett once praised bank stocks and panned gold. For instance, in 2009 on CNBC, Buffett said, “I have no views as to where [gold] will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, you know…Wells Fargo (WFC) will be making a lot of money… it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there.”
P.S. Wells Fargo stock was $28 per share in 2009, and it’s down to $24 now. Gold prices have doubled since Buffet cooked his own goose on this subject in 2009.
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