Costco, China and $2400 Gold
Friday, 4/12/2024 19:49
World No.1 gold-buying nation has hit its 'Lehmans moment'...
SO the GOLD PRICE has kept setting new all-time highs,
says Adrian Ash at BullionVault.
It cost $1985 per Troy ounce in mid-February. Today gold jumped through $2400.
Gold on Friday also made its 14th new all-time high in 15 trading days in Euro terms...
...up 13.5% in barely 3 weeks...
...while
the UK gold price in Pounds per ounce added £60 in 24 hours to fix at £1929 at London's 3pm physical benchmark auction.
Silver has run up even faster, jumping by more than 19% in Dollar terms so far this month alone.
Indeed, both gold and silver went pretty much vertical. No-one is sure why. But it's got everyone very excited.
Is this the top? Might be. For now. Prices have already
come back to Tuesday's then-record gold highs since Shanghai and London trading shut for the weekend.
But this peak might also, long term, be closer to the start than the end. Because the weight of Western investment is perhaps turning around, flipping from the repeated profit-taking of the past 6-12 months into positive demand.
More on that straw in the wind in a moment. First, who to thank if you've been
banking profits on gold or silver? Who to curse if you're still waiting to
buy gold or silver on a dip?
"Safe-haven demand fuels gold's record rally," claims Reuters today.
"Gold rallies above $2400 as Middle East risks stoke demand," says Bloomberg.
"Gold futures hit new record on central bank buying, safe-haven demand," adds the
WSJ.
It's hard to overstate the threat of major power conflict right now. Seriously. Yet major-economy stock markets have been rising, hitting new all-time highs of their own rather than spooking Western investors to buy gold.
What's more, central-bank buying isn't new (and contrary to Forbes' headline, they sure ain't buying gold futures contracts either). Western states stopped selling bullion in 2007 as the financial crisis took hold. Demand led by China, Russia and Turkey then grew the official sector's
gold reserve holdings at the fastest pace since World War 2 from 2018 to 2023. And while that half-decade of strong demand has set the tone – led by ongoing and relentless accumulation by the People's Bank of China – "central banks like orderly gold markets," as Rhona O'Connell at brokerage StoneX says, rather than looking to provoke such "lively" moves as this.
As for 'safe haven' demand for gold, it cannot a) refer to Western investment flows right now, because – again – they have been negative, and b) like the central-bank thing, it says nothing about the surge in silver. The more industrially-useful precious metal remains unwanted by national reserve managers, yet it's now trading at the highest for US investors since the $30 tops of 2021 and 2020 and it's reaching higher in Euro terms than any time since 2012 while breaking all-time highs in Japanese Yen.
To repeat: Western-economy investors have been selling gold, net net, during the 2024 jump in prices so far. Silver has been pouring back to market from Western investors, too.
By end-March, BullionVault users had cut their gold holdings 3.0% by weight and silver by 1.2% from New Year 2024...
...albeit letting their remaining holdings gain 4.2% and 4.7% by value respectively, taking the sum of their directly-owned, securely stored and fully insured bullion up to a new record above $4.2 billion.
Gold-backed ETFs as a group – the vast bulk of them listed in the West – had meantime dropped $6.5 billion in value, down 2.5% year-to-date even as the metal's price rose over 7% in Dollar terms. And coin dealers in Europe and North America have met such a flood of selling, some German shops are
apparently running out of cash while online stores across the West are slashing their mark-ups to try and shift some of the unwanted inventory now piled up in the basement.
So to figure out what's going on – and what might come next – ignore the Costco story. Or rather, fade the detail versus the impact.
"Gold prices red hot
as Costco gets in on gold rush," says
Forbes magazine, repeating PR puff that the US-based discount store has now been
enjoying for 6 months and more in the USA and UK (and which began way back in 2020 in,
umm, Iceland).
Now, if you believe the latest puff on
USA Today, then selling 1-ounce Maples $130 below spot is
proving a great loss leader, worth every cent in breathless PR.
"Shiny coins! In a shop! Which you can buy! (Terms & conditions apply, offer limited to 1x paid member's account...)"
Yet if the claim from a Wells Fargo analyst this week was right (as well as being perfect for yet more PR) and the demand for gold bars at Costco is adding "between" $100-$200 million to the wholesale discounter's gross sales each month, then that's frankly insignificant in global terms. It's below the total demand to buy gold on BullionVault for instance (before you account for investor selling) and it's a fraction of the gold pouring out of ETFs in recent months and weeks.
So who has really been buying? Cue
Newsweek (of all places) to
get it right...just in time for the story to start changing. Maybe.
"China is driving up global gold prices."
You've got to agree, year-to-date. While Western investors have been selling, China's central bank has continued to buy, seemingly at any price (another 5 tonnes even at March's then-all-time highs). And while the big jump in China's private gold demand actually began this time last year, it has gone frantic in recent weeks. Not that you'd know any of that from, say, Duke University academic Campbell Harvey.
Speaking to CBS this week, Harvey said "Institutional investors are piling in" rather than Joe Public punters, who anyway find gold "complicated to buy" and "costly to warehouse". He only compounded those 2 errors by
speaking for almost 5 minutes without using the word 'China' once in trying to explain what has been driving gold higher.
The real story?
As BullionVault noted
back in March 2023, and then repeated
throughout last year and
into 2024, "China's property markets have been very weak, the equity markets have been very weak, and this
narrows the universe that investors big and small are likely to look for," explains bullion-bank HSBC analyst James Steel to Bloomberg.
Against all that, "Gold is a great safe haven." And while the chatter in Western media asking
"Is this China's Lehmans moment?" about the failure of Evergrande, Country Garden and other massive real-estate developers missed the fact that Beijing wouldn't allow an uncontrolled credit collapse, China's private-sector gold buying suggests it hit something very like the West's
late-2008 crash culturally if not financially.
You see, it's there – in China – that gold has caught real 'flight-to-safety' demand, hoovered up by people buying jewelry, coins, small bars, kilobars,
gold accounts through banking apps, wealth management products, ETFs and mining stocks.
Contrast that with the lacklustre performance of US-listed gold miners. The
HUI index has only just outpaced the S&P500 so far this year, lagging the price of gold itself because – well, because investors in the West haven't been buying gold. So why would they buy gold mining shares?
China, on the other hand, is the No.1 gold mining, importing, central-bank buying and consumer market. It's also the world's 2nd largest economy by Dollar value, the No.1 by purchasing power parity, and it accounts for 1 in every 6 people on Earth. So there's no rush like a gold rush in China, and there's
never yet been a gold rush like this.
The visible data – due for release from the China Gold Association for January-to-March sometime later this month – will cover jewelry, coin and bar consumption. But "not only is offline consumption booming," says Chinese investment news-site STCN...
"Investors are
also enthusiastic about investing in gold through mobile and online banking as well as gold investment products on platforms such as Ant Fortune, JD.com Finance, and Tencent Financial Management Connect." And on top of that comes the Shanghai futures market, throwing kerosene onto the fire.
Trading in
gold futures and options rarely involves any gold. Speculators betting that the price will rise don't want metal – they want a cash profit.
But the tail often wags the dog, especially if the mutt is already jumping and barking and running in circles. And with speculative trading in Shanghai entering something of a frenzy in recent weeks – taking the price of physical silver landed in China to a frantic $3 premium above London prices on Friday, a massive 10% incentive for new imports – speculative trading has already risen sharply in New York's Comex futures and options, forcing (if not inviting) a bump in London derivatives trading as well.
"LBMA numbers show a massive jump in OTC option volume in March," says O'Connell at StoneX, pointing to the daily data from trading members of the London Bullion Market Association for 'over-the-counter' contracts. Options give a bullish player the right to buy at a fixed price sometime in the future, hopefully cheaper than where the actual price will have got to. But on the other side of those trades, they give a bearish player (or simply a merchant) the right to sell at certain price in future, locking in – for instance – today's new record highs no matter what happens to price from here.
Put another way, the jump in London bullion options' volume might signal a rush of bullish bets, or a rush to lock in prices by mining companies, or both. It also very probably reflects the need for bullion banks and brokerages to cover their exposure to all the bullish bets taken out by their speculative clients as well. Because for every long there must be a short, and that short will need to get or hold gold if they don't want to risk losing money should the price keep shooting higher.
Will it?
No financial market moves in a straight line, and if you're looking at gold as a hot trend to jump onto today, then you're more likely to find that it's now at the tail-end of this particular phase.
Short term, China's demand may well cool as the authorities warn against speculation, and the weight of Western gold selling could see prices struggle over the summer as No.2 consumer India enters its seasonally quiet period.
But looking ahead, gold has consistently offered investors a way to spread risk, reducing losses when other assets drop without hurting overall returns long term. Comparing gold to its historic highs priced against the stock market or in real terms after you account for inflation, today's new records are actually far below its big peaks of 2011 or 1980. And with gold and silver prices now enjoying clear blue water between today and the levels of only a few weeks ago, there are early signs of Western demand picking up.
BullionVault, for instance, has seen April 2024 mark the strongest 12-day start to a month since March 2022, when Russia's all-out invasion of Ukraine drove safe-haven demand for physical gold among Western investors. Giant gold ETF the GLD has meantime seen a slowdown and small reversal in its giant outflows, as have a handful of other Western-listed trust funds.
Straws in the wind? It most likely depends on whether the stiff breeze suddenly hitting Western stock markets turns into something more stormy.
Email us