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September
12
2023

Insider Gold Buying Reaches New Record Level
Peter Reagan

This week, Your News to Know rounds up the latest top stories involving gold and the overall economy. Stories include: Global gold holdings rise to highest level since 2012, a one-way flood of gold from West to East and are we missing out on platinum’s comeback?

Central banks are pushing gold investment to the highest level in over a decade

It’s mentioned often how central banks are one of the pillars of support when it comes to gold prices. Lately, though, it seems that they’ve taken on an even more prominent role in the market.

JP Morgan’s analysis recently said that global gold investment has reached the highest level since 2012. They downplayed the role of central banks, noting that individual investors and traders have become increasingly active in the gold market. And it’s hard to argue that gold, increasingly, is becoming a mainstream rather than an “alternative” asset.

But it seems we can’t check the headlines anymore without seeing a report of central bank gold buying. Even Turkey’s decision to sell a fraction of its gold reserves (which is probably the reason 2023 central bank gold buying won’t top last year’s record number) was, counterintuitively, a story about gold demand. The Turkish central bank sold some 71 tons of gold on the domestic market, to its own citizens. Thanks to inflation, citizens have all but abandoned the lira in favor of gold. We’ve reported on the Turkish enthusiasm for gold previously so we won’t recap the nation’s struggles at length.

Still, how strange is it that the Turkish central bank, which was responsible for the nation’s near-50% inflation is now selling gold bullion? And getting paid for it in the very same lira they’d printed a couple weeks ago? Seems like the citizens of Turkey are fed up with Modern Monetary Theory, and voting against it with their wallets…

In other news, China has now extended its streak of official gold purchases for the tenth consecutive month. The 930,000 oz of gold bought in August bring the nation’s official reserves to 2,165 tons. (And, as we know, that figure is probably more than a little under-reported.)

It also shouldn’t escape us that this massive expansion of official central bank gold holdings coincides with a reduction in foreign exchange reserves by 1.38%, the lowest level since the start of the year. In simpler terms, China’s using currency to buy gold – just like you or I would.

It wasn’t that long ago that it would have been strange to find an active central banker talking about gold. Yet today, we find central banks aren’t just hoarding gold themselves, they’re actively encouraging gold ownership among their citizens.

Strange times, indeed.

Emerging market gold purchases and a shift in power dynamics

The tale of the flow of gold from West to East has some room for interpretation depending on who we’re listening to. Some analysts believe it has been a fairly one-sided affair. Others, like Jan Nieuwenhuijs, say that it has been a 90-year-long back-and-forth until last year.

Nieuwenhuijs explains how this dynamic worked until recently:

• The West would “fix” the gold price in London and buy gold from the East during bull markets…
  
  
• …then sell gold back to the East back during bear markets.

Nieuwenhuijs finds it an exceedingly significant development that gold has risen around 17% year-to-date despite Western institutions being net sellers. This means, among other things, that the West has lost its ability to fix the price of gold. And the more careful observers know that Shanghai has, for the longest time, been very unhappy about London being the be-all-end-all when it comes to gold prices.

How the Shanghai Gold Exchange ends up tying into all this may yet turn out a subject warranting extensive coverage. Reports have already revealed that China essentially has its own price fix, with current premiums being higher than the LBMA’s price. As we wait for this to officially translate to the global gold market, we must concede that it already has if China’s and a few other Eastern countries’ central banks can dictate the price of gold.

There are several other points of interest Nieuwenhuijs raises. For example, private demand in countries like China and Turkey has likewise had a major impact on the market, and has risen despite higher prices. Hong Kong, which normally imports gold when prices slump, has been recording inflows even amid the recent highs. It’s possible that this trading hub is one of the ways for central banks to avoid public scrutiny pertaining to their gold acquisitions.

Nieuwenhuijs also stipulates that other nations, such as Middle Eastern ones, are buying gold in secret. More specifically, he believes that the World Gold Council under-emphasizes hidden purchases and their importance to gold prices in its reports.

It’s hard to not entertain this analysis. After all, the “beaten down by headlines, pushed down by high rates and a strong dollar” gold continues to conspicuously trade above its 2011 high. Is something besides real inflation pushing it up even during supposed bear stretches?

With a deficit of 1 million ounces in 2023, platinum is getting attention

CPM Group released an overview called “a platinum opportunity”. Price action alone seems to tell us one might indeed be brewing. Platinum had not too long ago retraced to $1,200, only to once again find itself below $900 almost as if to give another entry point to buyers.

CPM’s analysis prominently mentions fundamentals, and platinum’s are exceptional. Platinum demand rose for the third consecutive year, notching a massive 31% increase year-on-year in Q2. The World Platinum Investment Council projects an annual increase of 27% in demand for this year, while there is very little in the way of supply. Production can either be seen as maintaining last year’s weak levels, or having fallen considerably if we take into account the troubles of platinum’s primary producer, South Africa.

The industry body forecasts a 45% year-on-year increase in platinum coin and bar demand, while noting that institutional demand has risen to a three-year high. This is expected to give way to a deficit of 1 million ounces this year. By the end of the year, above-ground stock will represent only five months of demand. And since most of the stock is in China, it’s hardly readily available to meet any kind of global squeeze, whether due to investment or manufacturing demand.

CPM Group is reluctant to give a forecast past calling current levels cheap because of platinum’s intrinsic ties to the automotive industry. While it might seem certain that platinum has to break out, this is almost being negated by the overall automotive uncertainty. Which way will production swing? Is new automotive technology going to keep being pushed in the coming decades despite very limited results? While platinum does well in both petrol and electric vehicle environments, it’s the uncertainty of what will happen that is making the long-term picture complex.

Nonetheless, CPM does mention their early 2000s forecast, when they issued a buy signal as platinum moved between $400 and $600. As we know, it would go on to climb above $2,000. For the short-term, however, CPM mostly says investors should pay attention to platinum’s positively predictable volatility, with frequent swings between the $800 and $1,300 level over the past decade.

 

 

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

 

 

 

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