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Gold Price continues encouraging yet confounding pace

Jul 28, 2020

On the balance of news during the first half of 2020, you’d be hard-pressed to find anyone who might shy away from the thought that gold was sitting pretty. Gold-backers could hardly be blamed for their enthusiasm when the price per ounce closed 2019 at US$1514.75.
 That excitement continued through the COVID-19 outbreak in 2020 all the way to March 6th when it hit US$1683.65. North American producers were thrilled – those with all-in sustaining costs of less than $1000/oz were enjoying the short-term bump in profits, while higher cost producers above $1000/oz were equally happy to tell shareholders that better, more profitable days were ahead. Canadian producers also enjoyed the spread between the Canadian and US dollars that added even more to the bottom line.
 But after that March 6th high, the price dropped like a stone for nearly two weeks, coming to rest at US$1474. Depending on who you were listening to at the time, fingers were pointed in all kinds of directions including the paper-gold promoting COMEX (Commodities Exchange) that specializes in futures – massive institutional bets on gold’s future price.
 Major banks have been losing hundreds of millions – mostly because they were betting on gold – rather than buying physical gold.
 In the meantime, multi-million dollar computer programs continued to spit out data throughout the first half of 2020 suggesting that gold companies, juniors and majors alike, were not only poised, but in fact leading the recovery in the markets around the world.
 The price rebounded to more than US$1700 an ounce in early June before pulling back once more.
 Across the markets, companies like Barrick, Newmont, and Franco-Nevada were enjoying fresh interest from institutional investors.
 High profile billionaire hedge fund managers like John Paulson turned their attention to gold and it paid off.
 Mid-tier producers like IAMGold, Kirkland Lake Gold, and others have been added to a number of high profile buy lists.    
 In early May, gold-champion and billionaire mining investor Eric Sprott told his weekly podcast audience that “the big boys” are late to the party.
 “There’s obviously a move here to move into these stocks,” said Sprott about major gold companies long ignored by large institutional investors.
 Sprott mused, “The computers (of large investment firms) keep spitting out “what’s the best performing group?” Well, of course it has been the gold stocks and who has the best earnings? Well it’s the gold stocks.”
 Sprott told his audience that anecdotally there are a lot of investments happening in the majors. “The people selling those shares are going to be moving down into the intermediates and the juniors and the explorers,” he added.
 The one place that physical gold is always welcomed is China. China’s physical gold demand rebounded further in April. Gold’s trading volume and gold withdrawals from the Shanghai Gold Exchange were 356t and 96t respectively. According to some analysts, jewellery manufacturers were preparing for the widely expected Labor Day Holiday and Mother’s Day sales spike in early May, lifting China’s physical gold demand in April as a result.
 If gold is the darling of the markets, then why hasn’t the price spiked closer to $2000? One suggestion is that institutional investors, including banks, continued to short the price into June and their short contracts forced them to cover their bets while they lined up again to buy even more paper-gold contracts through August.
 Despite the volatility and unpredictability of gold, average investors and massive hedge funds continue their love affair with the yellow metal. Open interest, the total number of outstanding contracts held by market participants, measures the flow of money into the futures market, remains high – in fact, if you measure it against the global supply of physical gold, the demand outranks supply.
 And the final word on gold for the balance of 2020 might rest with how much paper money is printed (out of thin air) by central banks around the world.
 Historically, there are those who recall that US President Richard Nixon closed the gold window in August 1971. The economic downturn that followed led to the “crisis of confidence” that President Jimmy Carter had to struggle with.
 In 2020, the same conditions are emerging. Central banks are printing fiat currency, all while the Covid-related economic collapse does lasting economic and psychological damage.
 “What does this mean for you?” wrote SprottMoney.com analyst Craig Hemke in a recent blog. “Well, there’s one last bit of history that you need to recall. Even as nominal interest rates rose in the 1970s, they were outpaced by the price-inflation brought about by too much fiat chasing too few goods. Thus the “stagflation” of the 1970s was a boom period for precious metals and the companies that mined them.”
 Hemke reminded readers that the gold price moved from the Bretton Woods peg of $35/ounce in 1971 to $185 in 1975. It then pulled back to near $120 before soaring to $800 by the end of the decade, he wrote.
 The balance of 2020, and 2021 looks like a wild ride continues.

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