China’s Puzzling Gold Moves Revealed

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Central bank demand has played a huge role in gold markets recently. Then last week, the news that PBoC officials didn’t buy gold in May sent shockwaves through global gold markets. What does it mean?

Chinas Puzzling Gold Moves Revealed

From Peter Reagan for Birch Gold Group

This week, Your News to Know rounds up the latest top stories involving precious metals and the overall economy. Stories include: Sentiment at all-time highs in the gold market, why the picture for gold remains bright as ever, and Vietnam is developing a bit of a situation with gold bullion.

The lack of reason behind last week’s selloff in gold

Anyone who had any doubts about the importance of central bank demand and its effects on today’s gold price, including perceived importance, has been in for a surprise. After a week of profit-taking, gold remains just below $2,300/oz. down just a bit from last week’s $2,330-$2,360 range.

The trend of excessive attention to any downward move in gold price continues.

Let me climb on my soap box for a minute here… Mainstream financial news outlets love to talk gold down and leap on every opportunity – even a 1% drop over the course of a week generates three times as many headlines as a 1% rise. For these talking heads (calling them “analysts” is too generous), every rise in gold price is bad news. When gold goes up, their favored pro-growth, risk-on assets generally fall in price. And guess who advertises on financial news media? That’s right – the thousands of financial services companies whose stock-in-trade is pro-growth, risk-on assets, thoroughly processed via finance alchemy into almost unrecognizable (and incomprehensible) packages. That’s a little inside baseball for you – if you’ve ever wondered why, say, CNBC or MarketWatch are so eager to cover gold price declines, now you know.

This time, however, the blame can’t be placed solely on various outlets. We saw some selling after an announcement that China’s central bank didn’t officially buy any gold last month, ending 18 consecutive months of reported gold buying. Somehow, the “PBoC stops buying gold” angle was more important than the “PBoC is world’s #2 central bank gold buyer so far in 2024” angle.

So let’s take a closer look…

First, the PBoC didn’t announce that they’re done with gold, but merely didn’t publicly announce a purchase.

That brings up the questions we’ve been pondering for the last 18 months:

  • Why did China suddenly start announcing their gold purchases (when unreported over-the-counter (OTC) buying has been the norm)?
  • Why were the official figures so small? It’s China, the world’s second-largest economy and (lest we forget!) world’s largest gold-mining nation! Yet those monthly purchases were in line with those of, oh, Singapore or the Czech Republic.
  • Does China really only have a 2,000-odd ton gold reserve? Between the gold reserves of government-sanctioned enterprises, the military and the entire contents of the Shanghai Gold Exchange (SGE) vaults, multiple prominent analysts estimate true gold reserves of over 20,000 tons…
  • Does the rest of the global gold market really believe that China’s central bank demand is the sole determining factor in gold’s price?

And now we also have the question of this alleged pause in official gold buying. Why?

Maybe it’s because investors in China are panicking right now, and the PBoC doesn’t want to set a “bad example” buy buying gold?

Or that Xi sees the need for a weaker yuan to prop up the nation’s export sector?

Could the central bank be dipping into its gold-buying fund to boost the ailing real estate sector?

Maybe the story here isn’t “China pauses official gold buying,” but rather “China pauses official gold buying,” hmm?

After all, the World Gold Council often mentions how a large amount of gold in their annual purchase figures is from “unknown official sector entities.” In other words, China could have easily bought dozens of tons last month and simply not reported it. (Now, it can do the same, but with a small discount.)

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Since central banks don’t need to report their purchases, leaving the possibility that China resumed gold-buying under the radar, the selloff is puzzling. It’s as if investors were waiting for an excuse to take profits, after gold’s price took off unusually quickly.

Some aren’t afraid to push this theory to the extreme, speculating that we’ve seen gold’s peak.

That seems unlikely, given the consensus that gold would hit $2,500 this year, at minimum. What about all those $3,000 forecasts by the end of this run, including those by big names like Citi?

As always, the latest headline is the only one and everyone seems to have forgotten the last six months of outperformance. The factors that drove gold’s price higher for the last six months remain firmly in place. Granted, a lack of central bank gold demand would definitely be seen in the market.

If the PBoC doesn’t want to buy gold right now, many others do! In the UK, for example:

The Royal Mint said that it had seen a 49% increase in the number of customers buying precious metal bullion since the election was called.

The volume of gold bought through the Mint rose 117% in the week after the election, with spending on bullion up 145 per cent.

The election also seems to have nudged many to invest in precious metals for the first time, as 10 per cent of recent Royal Mint customers have never bought gold, silver or platinum before.

Keep watching the West-to-East gold migration

Since none of gold’s drivers went away, do we have any new ones to assess as the metal regroups before a run towards another all-time high? Alasdair Macleod dived deep into technicals, showing potential short-term corrections and long-term growth.

Of course, Macleod points out this is simply a part of a much greater run upwards. The latest forecasts issued just before the selling started attest as much, with little to suggest that much more isn’t yet to come. Most large forecasters have issued upwards projections to the end of 2025, which would suggest another 18 months of positive price action. See for yourself:

There are a couple of things to note. Macleod says gold looks oversold on the COMEX, which perhaps suggest the end of the correction is near. Equally as interesting, if not more so, to Macleod is that gold continues to leave the West for the East.

So far this year, LBMA’s silver vaults have been depleted by 60%, and those of COMEX by 46%. (Doesn’t that sound more headline-worthy than one month of China not reporting gold purchases?)

Macleod also notes that COMEX is seeing record stand-for-deliveries in gold (nearly 17 tons!) That’s the most since pandemic lockdowns began.

Macleod believes we should look to the Chinese household to understand gold market dynamics. Gold is emerging as the only option to park wealth in a nation where every other asset is, well, let’s say flimsy. Furthermore, privacy is nonexistent. So when Chinese jewelry shops are selling at an all-time-record pace despite record-high premiums, China is driving gold demand. Regardless of what the PBoC officially announces.

Speaking of flimsy assets, the European Central Bank (ECB) has given up on the inflation fight. Despite an official inflation rate of 2.6% across the euro zone, mortgage rates less than half those of the U.S. and, even more shocking, a 1.3% increase in the money supply! Regardless, the ECB decided to drop its prime rate to 3.75% from 4% — just a few days after the Bank of Canada became the first G7 nation to cut interest rates.

Now, I doubt you’re shopping for a home in Hamburg or care about overnight rates in Ottawa. So here’s why this matters.

When one major central bank acts, others follow. Major central banks play “follow the leader.” don’t immediately follow up their cousins’ cutting or hiking movements. That kind of coordination keeps the turmoil in the forex trade limited.

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There’s just one small detail this time around: It’s almost always the Federal Reserve making the first call. The Fed goes first, and others follow.

Clearly this time is different. Not only are market watchers now expecting all the other major banks to cut, but they know that the Fed is in a unique and difficult position. This is clear since it didn’t go first.

Macleod says that some are hoping the Fed will immediately follow, but we have seen many arguments to the contrary, even suggesting additional hikes. As we have previously said, the longer the hike, the greater the cutting. Last week aside, gold has been exceptionally comfortable in this hiking cycle. But it’s when the cuts start that most expect the run-defining gains to come. Even the slightest cut will be seen as a big blow to the U.S. dollar, which isn’t something we want to see when there are pundits (ahem, Paul Krugman) agitating for the normalization of a 4% inflation rate.

Reassurances, rumors and storefronts: How Vietnam is dealing with high gold demand

We’ve taken care to keep up with countries where gold is having a transformative impact on the citizen level. In Turkey, the lira has all but become a temporary placeholder for gold, where anyone with any savings runs to park them. Apparently, that’s the case in China as well, though people like to pretend it’s not. A similar situation in Egypt, with sky-high premiums and strained retailers struggling with consumers who themselves are fending off their wealth against currency erosion.

Though it doesn’t supposedly have the hyperinflationary problems of Turkey or Egypt, Vietnam has nonetheless been settling into the spot of the next country where gold quietly becomes the big thing.

The central bank of Vietnam recently issued a reassurance that the country’s gold supply is stable. The rumors to the contrary came based primarily on premiums, which told people something is wrong in the supply chain.

Over the past few weeks, the premium on Vietnamese gold bars climbed to as high as 23% compared to the global rate premium. But since the latter can already be lofty, it brings us to a figure of 30%-40% over spot for Vietnamese gold, and that’s for bars. When talking coins or even jewelry, the spread will be even higher.

The premium compared to West fell to 5.5% last week, but still affirmed the aforementioned, placing a Vietnamese gold bar above $3,000 when spot prices were around $2,300.

Based on additional warnings in the statement, there appear to be deeper troubles with the Vietnamese gold market. The bank hinted towards market manipulation, but didn’t go into its scope or size.

Right around the time of the central bank’s announcement, Vietcombank revealed that it opened four more gold stores, bringing the number of its brick-and-mortar vendors for the metal to ten.

Vietcombank, one of the country’s big four, referenced the central bank announcement and warned citizens to exercise extreme caution when evaluating gold bullion prices. Still, the chain openings tell us that the bank isn’t in the slightest concerned about the spread lowering, and sees a considerable physical market whose demand isn’t being met. So far, the bank’s gold stores have sold more than 13,000 ounces of gold.

Another instance of gold bullion becoming pretty scarce pretty quick and causing a kind of social upheaval. And this time, it wasn’t even the same old boring reason of a currency evaporating. Though if we went into it, we suspect we’d quickly find that the Vietnamese sovereign is full of structural faults that are driving this move into gold. While not quite as extreme as China and its lengthy saga of fake gold, Vietnam now serves as another reminder that physical gold isn’t always right there, waiting for a buyer to come along. According to data Macleod went over in his analysis, a similar but bigger tale might be unfolding in silver.

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