It doesn't always take a crisis to push gold prices higher, but it sure does help. Breaching US$2,000 per ounce has so far needed a global pandemic, Europe's most awful war since WW2, and a crash in the US banking sector that's already hit more deposits by value than the financial crisis did 15 years ago.
Now throw in a global real estate slump, inflation which just won't quit, sabre rattling over Taiwan, plus Washington's latest debt ceiling stand-off – could it be fourth time lucky for gold to push and hold above that US$2,000 mark?
Lesser-Spotted Bears
Spot prices have already risen 5% from the £1,580 triple-top in British Pounds, and May began with new all-time highs in Yuan, Yen, Rupees and most other currencies. Little wonder it's becoming increasingly hard to find any bears. Outside our market, however, gold has risen to these new record levels both quietly and despite the stiffest challenge from rising interest rates since the US Fed under Paul Volcker burst the late 1970s' bubble.
Even as US borrowing costs rose by four whole percentage points last year, across 2022 gold set a new annual record, averaging $1,800 per ounce. The Powell Fed has kept raising rates in 2023, yet gold this March set a new quarter-end and month-end record at $1979. Gold then set a fresh month-average record in April, topping $2,000 for the first time ever across the month’s LBMA benchmark auctions.
So far, so hot, but so what? Gold is failing to make front-page headlines, a stark difference from its financial crisis peak of summer 2011. Weirder still, it's lacking a mania among the usual suspects too. Yes, speculative activity in Comex gold futures and options has risen, but the net long position among money managers remains below half the frenzied level of late-2019. Coin and small-bar offtake has risen from the doldrums of 2019 and 2020 but it's running far below the 2011 peak, never mind the bonanza of the 2013 price crash bonanza. Gold-backed ETFs are meantime tiptoeing towards a third year of contraction, shrinking in both 2021 and 2022 and seeing another small outflow in 2023 to date.
So far, so hot, but so what?
The Unusual Suspects
With the real, retail and hot money out of the frame – and with global jewellery demand starting to struggle at prices jumping 25% in six months – today's unusual suspects are central banks. Led by the emerging-market gold-buying giants of China and Turkey, many of today's buyers are sovereign states suffering or fearing US-EU sanctions according to analysis in a paper for the IMF by economic historian Barry Eichengreen among others earlier this year. This demand is also showing in the London vault holdings data updated each month by LBMA and the Bank of England. Or rather, it's showing by its absence.
Since Russia invaded Ukraine, central-bank gold holdings worldwide have risen by 580 tonnes on the reported data and by twice as much on Metals Focus' estimates for the World Gold Council. But custody holdings at the Bank of England – historically the official sector's global storage and trading hub – have fallen by 520 tonnes, with London's commercial vault holdings also down 191 tonnes in the year-to-March. The city's combined total then rallied by less than 5 tonnes on April's strong month-average price rise of 4.5%.
In other words, today's big bulls are buying gold to hoard at home, rather than holding it ready for sale or lending in the world's central gold marketplace. If that highlights a growing mistrust between 'the West and the rest' in which gold remains politically neutral only in certain circumstances, it also highlights the need for our market to retain and extend its commercial appeal to international customers. One such opportunity is to assist HMRC with updating and clarifying the UK's VAT Terminal Markets Order as HM Treasury announced last month, something LBMA is already well prepared to consult on through its VAT Working Group of member firms.
As for price versus value, topping gold's 2011 or 2020 highs in real terms would now need nominal prices north of $2,400, and 1980's peak would equate to $3,200 against the US Consumer Price Index. Gold still has a long way to go. To get there and push higher still, it now offers a lot of room yet for the real, retail and hot money to get involved, too.
many of today's buyers are sovereign states suffering or fearing US-EU sanctions
