In our previous post, we made the point that if the old goldbug accusation that central banks and bullion banks were suppressing the gold price by selling or lending gold into the market is true, then in the current cash-for-gold universe — which features negative gold lease rates — the opposite must apply.
That is, the very same entities may now, if anything, be supporting prices in the market.
What’s more, the case for “gold” is increasingly being linked to future expectations that central banks and public authorities will continue to be large net buyers and borrowers of gold, rather than sellers.
The point is made nicely in this note from Moody’s Analytics on Tuesday:
One strong positive for gold demand is purchases for the reserves of governments and supranational organizations. After many years of shedding reserves, net buying by the official sector reached 456 t last year. The desire to diversify from major currencies may continue to drive such demand. But global official holdings by weight of 31,283 t lag holdings from a decade ago by 6%, which implies that recent purchases may not be consistently repeated.
Here, meanwhile, is the chart that supports the above (note the purple bar):
What’s really interesting, of course, is the degree to which the official sector has come to absorb gold in the place of ETFs. Furthermore, the degree to which gold bar and coin buying replaced jewelery demand after the crisis.
Indeed if not for the gold bar/coin frenzy and ETF demand (now substituted by official buying), one might speculate that the collapse in conventional demand (i.e. for industrial and jewelery purposes) may have led to a very different price path for gold post 2008.
Indeed, as jewelery demand fell, it was ETF and coin/bar demand that increasingly came to save the day for gold prices.
Now that ETF demand is waning, however, marginal support for the gold price is actually being provided by the official sector more than ever.
Though, given the gold price reaction of late, clearly even this is not so effective…
… so, either gold and coin buying has started to wane as well – and there is evidence that this is the case – or it’s taking ever more buying (by official sources) to keep prices supported at the current level.
That we suggest, may be down to gold price expectations finally having turned. Spot prices are, after all, most easily influenced by means of vaulting and stockpiling if and when today’s oversupply reality is offset by expectations of undersupply (or scarcity) tomorrow.
In the absence of increased scarcity expectations tomorrow, it takes ever more hoarding today to keep prices from falling from their current level. Especially in the event that coin purchases have to be replaced as well.
The recent plateauing of the gold price thus either suggest that today’s spot supply is increasingly catering to tomorrow’s demand expectations, or in the context of more gold being produced all the time, it is taking ever more buying by the official sector to keep prices from falling.
In the event that scarcity expectations turn into oversupply expectations, however, it might become almost impossible to stop the gold price dam from busting — at least without concerted and coordinated central bank buying.
In other words, sans the intervention of central banks on a major level: case bearish.
China central bank in gold-buying push - FT
Better the quality collateral you know? - FT Alphaville
Negative interest in cash, or goodbye banknotes - FT Alphaville
Debunking goldbugs – FT Alphaville
Gold coin sales fall in quarter, loses safe-haven luster – Reuters