Gold News

$2000 Gold: This Time for Real?

Comex bulls got gold to $2000. Central banks and festive buying to support... 
IS THIS new touch of $2000 gold for real? asks Adrian Ash at BullionVault in this note first shared with readers of the Weekly Update email on Monday.
I mean, will it stick this time?
Sure, gold has already made fresh record highs in Euros, UK Pounds, Japanese Yen, Chinese Yuan and most other currencies since Friday evening's big surge.
And there is no such thing as a triple top...
Gold first got to $2000 amid Covid and the first-wave catastrophe of 2020. Then $2000 gold came on Russia invading Ukraine in early 2022...
...and now we're here again as Israel's army flattens northern Gaza to hunt down the murderers, rapists and kidnappers of 7th October...
...with the US Navy sailing alongside as Iran-backed forces attack Uncle Sam elsewhere in the Middle East.
Chart of Dollar gold price, last 5 years. Source: BullionVault
Yes, gold bulls would appear to love misery and death. The 'ghoulish' tag is hard to deny when the chart looks like this. 
And no, there's no reason to think $2000 will act as a hard ceiling for gold prices just because it has tried and failed to hold above that level 3 times already.
Right now however, long-time pundits and analysts would point to 3 things:
First, silver isn't following, let alone leading, and the cheaper metal tends to amplify the moves in gold when the yellow metal is enjoying a deep and sustained move higher.
Second, gold mining stocks are also lagging the yellow metal. Again, that says real money is shy of gold's long-term prospects right now.
Chart of HUI gold mining stocks vs. Comex gold front-month futures contract. Source: Google
The HUI index has risen 15.4% over the last 12 months, but gold itself is up 17.7% in Dollar terms, and Friday's pop in mining share prices still leaves the sector over 5% lower for 2023-to-date right now.
Third, and to repeat and repeat, no one is buying bullion. Not net of selling. No one that anyone can see.
"Gold is overbought in Dollar terms on the [relative strength index] and getting that way on the Bollinger basis," says long-time bullion analyst Rhona O'Connell, now at brokerage StoneX, studying her charts.
"Definitely overbought in Swiss, Yen and Euro terms. And very much so in Thai Baht and Korean Won, so I'd expect physical to be coming back from those areas."
Physical metal is certainly coming back to market from BullionVault users... sellers as a group overall of £1 million per day in gold on average so far this month.
Gold continues to bleed back into the market from gold coin-and-bar owners as well.
"With these high prices, goods come back to the market," says one German retailer. "That's why there is still a lot of cheap product available at the moment."
Cheap is, of course, a relative word for retail bar and coin customers when they're paying 5% above spot to buy and facing 4% discounts when they sell, digging into the profits they might be hoping to take and switch into cash-in-the-bank, now offering something close to an inflation-matching rate of interest for the first time since the global financial crisis.
Shareholders in gold-backed ETF trust funds also continue to head for the exits as well. And as with the 2023 drop in coin and small-bar demand, this trend didn't need murder and mayhem in the Middle East to get rolling.
Chart of global gold-backed ETF trust funds' weekly flows (in tonnes of backing). Source: World Gold Council
The giant GLD and IAU products listed in New York ended Friday with their 8th and 14th consecutive week of net liquidation respectively...
...shrinking their combined size by almost 30% from the joint top of September 2020, the immediate aftermath of gold's first peep above $2000 per Troy ounce.
Germany's Xetra Gold ETC has meanwhile shrunk by another 1.3% so far in October, down to its smallest size since February 2021 and shrinking by 1/10th from spring 2022's all-time peak...
...and the London stock market's 2 largest gold-backed trust fund products have meantime shrunk to their smallest since April 2021, down by more than 1/5th from their combined peak of April 2022.
Put another way, the ghouls of gold aren't to be found among BullionVault users, coin-and-bar consumers, or ETF traders.
So who's buying hand-over-fist to drive $2000 gold?
Like Rhona O'Connell suggests above, Asian households aren't likely leading this move.
Gold near $2000 was already denting the run-up to Diwali in India, typically the No.2 gold consumer market's biggest gold-buying season, before this latest price pop.
Some households in China are also rushing to cash in, at least with any old or broken bits of jewellery they can find according to the South China Morning Post, even as others continue to buy new bars and bullion jewellery at today's record-high prices. 
And why not? China's domestic gold price has risen by more than 21% in Yuan terms from this time last year. That makes it the only bull-market in town both for profit-takers and for new investment inflows.
Productive demand for gold meantime continues to shrink as a proportion of the market, now decisively below the 10% share which it used to enjoy when the rise of the microchip met what was left of dental demand for gold fillings.
That leaves, like we keep saying, the unusual suspects of central-bank gold buyers, led by China, India, Singapore and Thailand over the last 3 years.
Central banks already took their net gold demand as a group up to record levels in 2022, and 2023 looks very likely to top it on best estimates for the gold demand which those hoarders do not deign to report.
But really, today? Or over the past 3 weeks? Honestly, do the state-employed national asset managers of Beijing, New Delhi, Shenton Way and Bangkok present the most likely suspects for rushing to bid up gold to new record highs even as they try to grow their bullion holdings for long-term security, stability and diversification
I doubt it. Not compared to this lot.
Chart of Managed Money's 2-week change in Comex gold futures and options net bullish position. Source: BullionVault via CFTC
See the blue circle, top right?
It highlights the 2nd highest figure ever for the red line. And that red line tracks how over-excited the hot money has got in gold, betting on prices rather than actually paying those prices to buy any gold.
Look, as we noted in last week's Update, something very odd happened in the gold derivatives market in the immediate aftermath of Hamas' vile atrocities in Israel.
Speculative traders – better known as 'Managed Money' by US regulator the CFTC, which collects the data on trader positioning each Tuesday – actually grew their net bearish position from the week before using Comex futures and options.
In other words, the hot money was betting that gold prices would fall.
But since then, the ghouls of gold have reverted to type, cutting their bearish bets and hiking their bullish bets as a group. And that move has been so rapid, it's flipped the Managed Money category from net bearish to solidly bullish.
More dramatically, it has added 328 tonnes of notional gold to their net position overall (red line, right-hand axis above)...
...the fastest 2-week rise ever outside of mid-2019's sudden spike, when the world and her husband suddenly decided the Fed would start slashing US interest rates amid a US recession which would drive gold prices higher.
Remember, this isn't even make-believe gold. No one betting on the gold price via the futures market wants to own physical bullion. They would just go and buy it if they did (say, using BullionVault to keep their costs low and their 24/7 access unbeatable, like their physical security).
No, what these speculators want instead is to bet $1 for the chance of a $10 gain if things run their way. And after the Managed Money was caught short when gold prices started to jump following the horrors of 7th October, it has now rushed to get long...
...and it's rushed faster than any time on record outside mid-2019.
Maybe they're right. Maybe gold will keep pushing higher, rising and holding above $2000 per Troy ounce. But if so, then actual gold buyers will at some point need to start swallowing and stop selling the steep cost jump of the last 2 weeks... pricing gold 10% higher in US Dollar terms and up at fresh record highs in most other currencies.
Could that happen? Yes of course it could. And it very well might.
How else do you think gold went from $250 back in 2001 up to $2000 today?
Gold's big jumps always spook jewellery consumers, and they invite profit-taking among physical traders and investors too.
But the underlying uptrend in gold started long before Hamas' terrorists broke into southern Israel. And it has always needed...and always got...buyers to come in eventually, whether on a pullback or on swallowing their desire for a dip.
All this said, the stars aren't classically aligned for gold to run and run, not on the 'old hands' criteria at the top.
Maybe silver and the HUI will suddenly catch up, or maybe something is different this time. But it also needs noting that the $2000 handle clearly represents a big psychological level for the global gold market to accept. To date it has rejected it 3 times.
Gold's floor since the last attempt in April-May this year, however, came in much higher than it had come in following the 2 previous tops. The floor rose even though demand from Western private investors was much lower and then turned outright negative.
So to repeat: Central banks are playing a huge part in this, as pretty much everyone I spoke to about it agreed at this month's LBMA conference. And this time, gold $2000 has come as the world runs into the key Diwali-Christmas-Chinese-New-Year period.
Yes, the recent price surge will hurt tonnage demand among those consumers. But many private households MUST buy some gold during this period, whatever the price. And as gold turns to face 2024, history says that if this attempt above $2000 doesn't quite hold, those consumers are sure to buy the hell out of any dip, bringing the floor higher again as the global gold market gets used to higher ground once more.

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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