Why is gold rallying? Maybe the word “finally” should be added to this question, because it’s been a long time since the metal generated any excitement. Even gold bugs would have to acknowledge the industry has been dull.
True, in March 2022 the yellow metal hit its all-time high of $2,075. But that was a while ago, and since then the price has been trending lower. Actually, gold went nowhere fast for most of the 2010s – unlike the market, many high techs, real estate and even some cryptos which enjoyed amazing percentage gains.
Now that gold appears to be awakening, investors need to ponder whether this rally is for real or a false breakout that will peter out quickly.
Spectacular Or Close To It
The renewed interest in gold began on November 3rd. The low that day was 1619. But by the following day, November 4, the price had soared to 1686 – an amazing $67/ounce increase. It was the best one-day rally since January 1980 and by some measures the best ever.
Silver also began rallying Nov. 3rd. Both of these metals continued moving sharply higher in the following days.
Why the sudden excitement? This question is very difficult to answer because even basic information such as who is buying is unknown. Still, we can learn important lessons by studying the information that is available to us.
Mystery And Secrecy
Precious metals made a then all-time high in 1980 and were the rage of Wall Street. But with very few exceptions since then gold has lost its allure, as investor interest shifted to stocks, bonds, real estate and/or cryptos.
Nevertheless, there are and always have been gold bugs, understandable since gold is used in industry, is recognized as a store of value, hoarded by both central banks and investors, and has been used as money for millennia.
A few weeks ago, while Wall Street was avoiding gold and mining shares, savvy investors saw that as a sign that all irrational exuberance had been drained from the price – and a great buying opportunity was at hand.
Bank On It
The still relatively low price for gold shouldn’t be interpreted as a lack of interest in it. In fact, demand has actually been extremely high. In the nine months from January 2022 - September 2022 demand for physical gold returned to its pre-pandemic pace according to the World Gold Council – and then some.
Central banks – the people who set policies and who hold the purse strings – have been and are stocking up on it. In the third quarter alone they purchased a record 399 tons of bullion; that’s almost double the previous record according to the World Gold Council.
Yahoo says they are accumulating gold at the fastest pace in 55 years, and the central banks of Turkey, Uzbekistan, Qatar and India are among the largest buyers.
While the rally in gold is getting attention, Wall Streeters are trying to figure out who purchased 399 tons of bullion. Bloomberg reports that “Just under a quarter went to publicly identified institutions, stoking speculation about who the mystery buyers were who purchased the other 300 tons of gold in the third quarter.”
Central banks often disclose their precious metals purchases to the International Monetary Fund but don’t always do so for economic and political reasons; this appears to be such an occasion.
There’s a lot of speculation that China was the buyer. According to an article on Zero Hedge, “China hasn’t reported any change in its gold hoard since 2019, fueling speculation that it may have been buying under the radar.” Even without those purchases its gold imports grew to a three-year high.
From the beginning of 2022 until November China imported more than 900 tons of the yellow metal, more than the total amount they imported last year. (They also mine more than 300 tons.)
If China is the mystery buyer, why are they buying so much gold? Experts say they desperately want an alternative to dollars because of political tensions with the US, and because the dollar is losing value due to inflation; dollars still make up a huge percentage of their reserves. They also are forming alliances with other nations and there is speculation they will introduce a new currency that will be an alternative to the dollar; it may be backed in part by gold and/or other commodities and currencies.
There also is speculation that Russia, the world’s second largest gold miner, is the purchaser. Russia has purchased huge quantities of gold in the past, but their overall foreign exchange reserves, including gold, have declined this year.
Another possibility is that Saudi Arabia is the buyer. The Saudis are believed to have the biggest gold hoard in the Arab world but haven’t updated their holdings since 2010. They too might join in a new currency backed by gold. Or maybe they believe gold is a good long-term investment.
Crisis In Cryptos
Whomever the buyer is, a new development on The Street could have far-reaching consequences. Cryptos are crashing in reaction to a liquidity crisis at FTX, a popular crypto exchange.
Already some major players in the crypto world have been wiped out and their losses reach well into the tens of billions – if not more. And soon more losses may follow.
Interestingly, the crypto crash began just days after gold began rallying. Of course, the timing may be coincidental. But it may not be. Could the rally in gold have come in anticipation of the crypto crash? Depending on how developments unfold the rout in cryptos could end quickly or spread to additional major investors and investment firms and if that happens it could send shock waves through the financial community.
Whatever happens, all of these events reinforce the idea that gold still offers a measure of safety during times of political and financial uncertainty. Why not check with your financial advisor whether gold belongs in your portfolio? Safety first, always a good idea, is as important these days as it ever was.