Gold prices have risen nearly 2.5% since the start of the new year, reaching a seven-month high. So what/who is behind this latest rally? The macro outlook for gold remains unchanged, with analysts pointing to a mysterious buyer.
“The increase in gold is not associated with a changing macro narrative”
As you follow on Kriptokoin.com, gold has approached the $ 1,900 level. February Comex gold futures are trading at $1,877.20, up 0.40% on the day. Some analysts are explaining the recent rally as the Fed’s pivot and investors turning to safety ahead of the impending recession. However, TD Securities does not think the macro outlook for gold has changed. And the bank believes a mysterious buyer is responsible for the gold price spike. Daniel Ghali, senior commodity strategist at the bank, explained:
The rise in gold prices over the past two months has defied expectations of continued weakness from analysts, including TD Securities. However, we see little evidence that the rise in gold prices is associated with a changing macro narrative.
Gold prices are rising under the influence of whom/what?
The bank also points out that speculative interest in gold is still weak. “We still don’t see enough evidence of significant buying activity from money managers,” Ghali said in a report released Monday. Also, “This begs the question: Who is this mysterious buyer who is driving prices up?” he asks.
According to TD’s analysis, central banks, especially China, are currently driving the gold price, causing price levels to become mismatched. “Armed with a flow-based approach, we provide compelling evidence that massive Chinese and official sector purchases alone may have led to $150 overpricing in the gold markets,” Ghali says.
Over the weekend, China reported that it bought another 30 tons of gold in December. This follows the People’s Bank of China purchase of 32 tonnes of gold in November, the first officially recorded purchase since September 2019. China’s gold reserves currently total 2,010 tons. Central banks around the world bought record amounts of gold in the third quarter of 2022, according to the World Gold Council (WGC). And many analysts think this trend will continue into 2023.
“The main culprit is probably China’s large-scale demand”
A total of about 400 tons were purchased by central banks in the third quarter. This marks a 300% increase over the same period of the previous year. Since the beginning of the year, central banks have bought 673 tons. That’s more than any other annual total since 1967, when the US dollar was still backed by gold. All eyes are on WGC’s fourth-quarter report, which will be released at the end of January with updated figures for the year. Ghali adds that market participants are speculating about large-scale secret purchases from Russia and China. In this context, he makes the following assessment:
Our follow-up of the top ten exhibitors in Shanghai highlights the notable increase in the net position of this group. This is equivalent to 100 tons under notional since December 20. This was primarily due to the more than 16,000 lots of SHFE new longs acquired during this time period. Moreover, since the beginning of November, Shanghai gold has maintained its significant upward trend. While traders’ net positions are approaching their highest levels in the past twelve months, the pace of gold purchases by Shanghai traders is yet to show any signs of slowing down.
On top of that, Chinese gold premiums remain significantly high, pointing to strong demand from the retail sector, according to the report. “The main culprit behind the strong price action that has challenged analyst and trader views over the past months is probably China’s large-scale demand,” Ghali said. “This helps explain the disconnect between gold and real rates in favor of a tighter relationship with currencies.” TD Securities believes that strong Chinese demand continues to support gold prices. However, the bank does not see this driving force as sustainable.
“This situation may be supportive for gold prices”
In an update released on Saturday, the People’s Bank of China announced that it increased its gold reserves by 30 tons in December. This follows November’s purchase of 32 tonnes of gold, the first officially recorded purchase since September 2019. Some analysts say that this could continue to support gold prices as it approaches $1,900.
“When the world’s second-largest economy buys that much gold, a bull situation occurs,” says Jim Wyckoff, senior technical analyst at Kitco. He notes that the market sees central bank gold purchases as ‘Smart Money’. However, not all analysts see China’s purchases as a game changer for gold. Marc Chandler, managing director of Bannockburn Global Forex, notes that China’s gold holdings still play a minor role in the central bank’s total reserves. In this context, the analyst makes the following statement:
Many images were used to talk about China’s diversity from dollar to gold. We have reduced this importance. Gold assets were up nearly $5.5 billion in December, up $117.2 billion, or just over 5%. This is little more than valuation adjustment. Before you get too carried away, remember that at the end of 2020, China’s gold holdings are worth $118.2 billion. As a percentage of total reserves, the share of gold was almost unchanged at 3.7% in two years.
“Central bank gold demand changed the rules of the game”
China’s continued purchases come as central banks around the world provide a broad appetite for the precious metal. Krishan Gopaul, senior market analyst for Europe, Middle East and Asia at the World Gold Council, states that between the first and third quarters of 2022, Central Banks purchased 673 tons of gold.
In a report released last week, Gopaul said central banks bought 50 tons in November. Along with China, Turkey’s central bank added another 19 tons of gold to its reserves. In addition, the Central Bank of the Kyrgyz Republic bought 3 tons of gold. Analysts expect central banks to continue buying gold through 2023 as it moves away from the US dollar.
Sean Fieler, owner and chief investment officer of Equinox Partners, says central bank gold demand in 2022 is game-changing for the gold market and showing investors that there is real value in the precious metals market. He adds that China’s gold reserves are still at extremely low levels and there is room for further growth.