ROSS NORMAN - GOLD - Quo Vadis - Who Is Behind The Gold Buying ?
The rally in the gold price has left me non-plussed ... who is behind it and why ? Rather like an Agatha Christie murder-mystery novel, with evidence thin, the culprit or cause may be deduced by excluding what it is not ... and what remains, is.
Spoiler alert ... I am really not sure of the answer, but follow me ... it's fun anyway.
1.) Institutional buying ... deeply unlikely; the gold ETFs have seen net redepemptions (or selling) for the whole of 2024 YTD, although there was a small spike in US buying that was matched by European selling, then faded. For sure this would have been the door that major institutions would have adopted if wishing to increase gold exposure.
Sources: Bloomberg, Company Filings, ICE Benchmark Administration, World Gold Council
2.) Speculators ... the futures market is highly transparent with data reported weekly by the CFTC. For sure there has been an increase in the net long position but certainly not sufficient to account for the rally in gold prices. The initial rally was stoked by some short covering but one has a sense that conviction is fading.
3.) Western physical demand ... a big nope. The all time high prices in local currencies, coupled with the speed of the move has prompted significant disinvestment by traditional coins and bar buyers. German dealers have been swamped by metal being sold back and a number of dealers have been caught with large stocks they cannot sell and hence apparently selling these at a discount to the spot price to reduce their cost of holding inventory.
Reflecting this reversal is possibly the leading gold buying platform BullionVault where sellers outnumber buyers as can be seen below ... in short, the consensus amongst typically gold bulls is that gold may have got ahead of itself.
4.) Central Banks ... With gold demand running at over 1000 tonnes these last 2 years, which is double the run rate of the previous 5 years, this looks plausible. That said, firstly central bankers typically purchase through the official benchmark and secondly these timid souls tend not to chase the market higher. But the buying is not on the "fix" and it has a degree of motivation and conviction that is not a hallmark of the rather more nuanced buying we expect from this quarter.
Quite possibly though their buying is coming through non-traditional routes. Their motivation for buying is clear ... not only is the world in a precarious position economically and geoplitically, but the over-use of sanctions and the weaponisation of the dollar will have persuaded many to increase the weighting towards non-dollar assets or reserves.
5.) China ... With available retail savings of about 20 trillion yuan, a stock market in freefall and unrealized property sector losses, gold represents one of the few surefire and dependable investments... and they know it.
In Jan 2024 there was a staggering 271 tonnes of gold withrawals from the Shanghai Gold Exchange which is seen as a proxy for local demand. We also hear there have been well above average shipments of gold from the West to the East by security firms (now you know where all those western sales went) ... but again, not quite enough to account for the manner and extent of the gold rally.
But Chinese demand is opaque and news and reporting is often anecdotal. Some import entry points are well monitored (esp. Hong Kong) but other routes less so ... local premiums are known but often this can be misleading ... high premiums can be because demand is hot, or simply because availability is low (import quotas to banks being reduced by the PBoC for example). The prevailing high premiums in China of around $25 over the international price though can be more ascribed to limited supply than excessive demand.
6.) India ... rivalling Chinese demand in size, but often with a different metre, Indian demand is central to price action too. Notoriously price sensitive it gives gold price its elasticity and tends to provide a floor to the market.
Indian dealers have an uncanny feel for the market and are a respected bell-wether. And today Indian dealers are sceptical of the gold rally and demand has cratered in the region even though we are in the wedding season. Reflecting this, local prices are trading at a discount to the international price which has deepened from $35 to $40 below. In short, Indian dealers is at odds with Chinese buyers... meanwhile the West continues to offload.
7.) Other ... a much under-reported phenomenon is the role of algorithmic trading in gold trading - albeit very prominent in FX. Algos are all very different by design, but many are simply momentum followers. That is to say that in a rising market the next market price is more likely than not, to be higher. So they buy. The problem with this is that if too signifiant a factor in the mwrket, they can create their own weather. It may be rising BECAUSE they are buying and they can become locked into a self-fuelling cycle. Is this happening here ... maybe. I don't know. The point is the market is behaving atypically and these models care nothing for market fundamentals.
For example gold is rising despite falling investor, institutional and speculative demand .. it is rising despite headwinds from a stronger dollar, firmer treasury yields and a vix index that remains lacklustre. And it is rising despite the relative non-performance of silver which normally heralds a shift higher in the metals complex.
We had heard that some new US mutual funds had entered the market and they may be positioning themselves ahead of a US rate cuts later this year. But recent US data suggests inflation is sticky and the US economy outperforming with the expectations of a rate cut at the June FOMC falling beliow 50% ... yet gold then rallied to an all time high.
This is possibly the longest apology I have ever penned, but this gold rally mystifies me.
Quite possibly it is a combination of Chinese and official sector buying from other routes, coupled in some sectors with mounting uncertainty over US debt and its manageability. If so, then this could be regarded as extremely "high quality" buying in that it is unlikely to be reversed ... and this rally is strong and has legs to run ... on the other hand, if it is one of those damn algos then expect trouble ahead ... after all, momentum can travel in two directions.
Ross Norman
CEO
MetalsDaily.com
ross@metalsdaily.com