Gold Price Defies ETF Outflows as Central-Bank Buying Trumps 'Negative' Variables
Wednesday, 5/08/2024 15:32
The PRICE of GOLD held firm in London trade on Wednesday despite fresh US gold ETF outflows overnight, fixing above $2300 per Troy ounce at the City's 3pm benchmarking auction in the face of rising longer-term interest rates in the bond market, against which the bullion price usually moves inversely.
Gold prices in China had earlier edged back towards Monday's 2-week low to fix beneath ¥545 per gram on the Shanghai Gold Exchange, cutting the premium over London quotes to $26 per Troy ounce and suggesting softer
demand in gold's No.1 consumer nation.
More than 3 times the historical incentive for new bullion imports, that premium is 1/3rd below the average level of 2024 to date.
"Central banks and Chinese investors likely drove April price strength," says quantitative analysis from the mining industry's World Gold Council, plugging data into its
'gold return attribution model' and finding that "existing variables and their longer-term relationships to gold...failed to capture price strength in its entirety."
"The rise in the price of gold in 2023 and this year has taken place in
an environment of rising interest rates and a strong Dollar," says Guy Wagner, chief investment officer at Banque de Luxembourg's investment division – "in other words, in an environment that is
generally regarded as negative for gold.
"So there are other factors behind the price rise, such as the purchases by central banks in the East in particular."
"Adding a geopolitical risk proxy," the WGC goes on, "as well as
positioning in the Shanghai futures exchange, offers an explanation for some of the moves in March and April, but one other major explanatory factor is still missing...central bank buying."
"The central banks' gold buying spree continues unabated,"
agrees an article published by Xetra, the largest German gold ETF product – now shrunken to its smallest size since March 2018 in a national gold trust-fund space shrunk to the smallest in 5 years.
"After
record gold reserve purchases in the last two years," says Xetra, quoting estimates made last week by the World Gold Council, "the first quarter of 2024 turned out to be the strongest ever...topping the five-year average by 69%."
With
China's private gold demand surging in Q1, Asian-listed gold ETFs have grown 20.9% by weight so far this year according to data compiled by the WGC.
But that has offset only 1/6th of the outflows from North American and European gold-backed trust funds, which have now shrunk to their smallest since New Year 2020 overall, erasing the last of their Covid Crisis inflows.
Led by the giant GLD trust fund,
gold ETFs listed on US, Canadian, UK, German and other Western European bourses swelled almost one-third by weight between January and October 2020. It has taken 42 months and a price rise of 30.9% – some $540 per Troy ounce – to reverse that inflow.
As a group, North American ETFs saw a 1-tonne expansion in April according to
the WGC's latest updates, but that 2nd small month of growth in a row left them 1/10th smaller from this time last year.
European trust funds have meantime shrunk 16.1% and have expanded in only 1 of the past 24 months.
"I have always argued that
gold is a low-beta way to play emerging markets," says economist Louis Gave, founding partner and CEO of consultancy Gavekal.
"[So] a threat to [this] gold bull market would be for either Japanese or Chinese private savers to stop buying gold – or even start selling it. This is unlikely to happen until we see a tighter monetary policy in either nation.
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"At the same time, gold's upside could be material if Westerners start buying precious metals in earnest (instead of Bitcoin and tech stocks)...[But] there is little sign of this, as shown by leading exchange traded funds that offer gold exposure having recently seen net outflows.
"This would seem to indicate that there is still room to run."
As for central-bank gold demand – softer but ongoing in April on the latest official data so far – "I think we will continue to see these purchases in the future," reckons Wagner at BLI.
"Emerging market central banks drive the gold rush," agrees research from US investment bank Goldman Sachs, noting that gold bullion accounts for only 6% of those institutions official reserves, less than half the average allocation across rich-world economies.
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