All that glitters…understanding the structural forces behind the market rally in gold
Ned Naylor-Leyland and Daniel March discuss the structural factors behind the recent surge in the price of gold and analyse the factors that could push the price even higher
Gold has already digested a reduced outlook for expected easing by the Federal Reserve in 2024. Despite this, gold continues its upward trajectory. This suggests additional factors are at play, such as the return of significant physical demand, particularly from China and the Middle East. This physical buying spree could be driven by a confluence of factors, including inflationary concerns and rising geopolitical tensions in the Middle East.
China has become one of the world’s most significant buyers of gold, with the China Gold Association (CGA) reporting that the country’s gold consumption in 2023 totalled nearly 1,090t, an increase of 8.73% from the previous year (China’s young generation powering gold rush – Chinadaily.com.cn). Another measure of China’s overall demand for gold, the Shanghai Gold Exchange (SGE), saw demand in January up 95% (YoY)
The strong appetite for gold in China can also be seen in the ‘Shanghai Premium’ – a measure that calculates how much physical gold costs in China over the international price spot price. The ‘Shanghai Premium surged to a record high of $100/oz last year, and has stabilised in recent month to $30-40/oz. A strong premium in the East is important as it presents an opportunity for international bullion banks to purchase gold in London/NY and sell into mainland China – a structural demand pull of gold moving across the globe.
Behind the record demand from China an interesting demographic shift is taking place. Younger buyers aged 25 to 34 saw their share of overall gold purchases rise from 16% to 59% in 2023. Declining stock market, and local real estate values, have contributed to the increase from the younger generation, but it’s the investment form that indicates the true nature behind the demographic shift.
Younger buyers in China are choosing to acquire 1g gold beans as a form of long-term asset preservation.
The below chart is a measure of total wholesale gold demand in China.
The lower import duties via the Indian International Bullion Exchange (IIBX), which was established in July 2022, has likely contributed to the surge in silver flows, with the record February flow representing an unsustainable ~8% of the total annual mine supply into a single country. Industrial uses aside, India still imported over 30 million ounces of silver bullion last month from London, which suggests a tilt towards the cheaper of the two metals, with the Gold-to-Silver Ratio (GSR) still elevated near 90/1.
Source: DGCIS (dgciskol.gov.in)
Silver ETF Flows (white line) vs Silver Price (blue line)
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