Can this gold bull run be trusted?
Cast your mind back to 2009 and you might recollect the cash-for-gold craze where people were hunting out their old jewellery to sell it to pawnbrokers as gold hit successive all time highs.
Perhaps you also remember the Cash4Gold advert at the Super Bowl just a couple of years before the then all time high of $1920 in 2011? This had followed a decade where gold prices had risen by double digits year-on-year from $260/ounce – a gain of 640% over the period. Was the advert an act of hubris or uhh- ohh moment ? Maybe, but gold bugs are still dining out on that epic run.
And it has relevance today.
The rally actually started back in 1999 and it had deep roots. There was a collection of bullish drivers that changed the whole dynamic of the gold market and it was sufficient in size to tip the market out of being price elastic – its default mode. Typically price strength was met by significant declines in jewellery and coin sales, while scrap came into the market and miners sold forward into price strength … so prices reverted to the mean. Equally when gold prices were cheap, bargain hunters filled their boots and the market corrected higher. Importantly, the thinking was so entrenched in peoples expectations that it fed group-think or a self-fuelling feedback loop.
And then things changed.
The central bank gold sales under the Washington Accord started to slow (before they turned buyers), while across Europe tax at 20% was removed from investment gold in Jan 2000, the Chinese market was liberated in 2003 with individuals allowed at last to buy gold, in 2004 the gold ETF was born, forging a powerful conduit between institutional investors and the gold market that had not otherwise existed … and so on. You get the picture - it was comprehensive. So gold went “inelastic” for a decade with price strength begetting price strength … the feedback loop was going the other way. And then it all arguably ended with the cash for gold blow-out before the market fell, exhausted, into another decade slump.
And this is the key point – for gold to sustain a run of this sort, buyers need total belief. Its one mode or the other. And around the globe we certainly do not have consensus just now. European and US bullion dealers are awash with coins and bars that investors are selling back, jewellery sales in the Middle East and India are lacklustre … it is only really in China that they see things differently. Meanwhile mints around the world are reporting declines of between 80% and 95% year on year. This slump in physical offtake is deeply damaging for the bullion infrastructure that we all rely on.
Of course you could also add to Chinese demand the strong central bank buying with purchases running at double the run rate of the last ten years at over 1000 tonnes per annum. As an aside – you will see some interesting stories on MetalsDaily.com today about several central banks repatriating their gold from the US – so for sure the de-dollarisation story is gripping them.
I am just not persuaded that these 2 drivers are sufficient to maintain this run in gold alone – and I am quite aware that I am an outlier in that almost every bank analyst is now forecasting massive gains for gold from here.
Central banks are more nuanced these days and they will reduce their acquisitions in the face of price strength as we have already seen. Further, much of the Chinese buying from early March 2024 when gold was at $2050 is speculative in nature on SHFE – it is vulnerable and as we are seeing just now, its in reverse.
Currently gold is ignoring many short term bearish signals – higher-for-longer, dollar strength, US treasuries near 17 year highs and relative calm on the geopolitical front. It needs a reset.
Gold lacks global conviction and consensus. Maybe this is its second cash-for-gold moment ?
By rights gold needs to re-engage with its core physical buyers, who by my estimation are about $100 to $150 south of the current levels. At those prices investors in the West, and jewellery demand in the East will reawaken and the market will be better balanced.
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Ross Norman
CEO
