WHAT IS TRULY BEHIND GOLD´S BREAKOUT? / MACLEOD FINANCE

What is truly behind gold's breakout?

In this article I look at global supply and demand and pinpoint lack of supply

MACLEODFINANCE

On Friday, gold suddenly rose to $2080. 

The proximate reason was remarks by Fed Governor Christopher Waller that in future the Fed is likely to purchase Treasury bills rather than term bonds. 

This is in line with the Treasury’s statement that it is prepared to breach its 20% maximum of debt liabilities held in T-bills.

This is a clear signal that US Treasury debt average maturity will be shortened. 

The wisdom, or lack of it in this move need not detain us here. 

But the market appeared to think that the lower supply implied of debt along the yield curve would lead to lower bond yields (the 10-year yield dropped from 4.29% to 4.18% on the release of Waller’s speech.

That gold should rise over $40 on this news seems an over-reaction. 

And frankly, we have no idea whether it will follow through next week — only time will tell.

But the underlying technical position suggests that the merest excuse was needed for gold to resume its bullish trend. 

In this article I examine the global supply and demand position for bullion, which explains why even now demand is exceeding mine and scrap supply by a large margin.

Demand is soaking up all new mine supply — and more

According to the US Government’s Geological Survey, global goldmine output in 2023 was 3,000 tonnes. 

The sources are shown in the USGGS table below:

To this supply we can add an estimated 1,200 tonnes of scrap for a total supply of 4,200 tonnes. 

So, where was the demand for it?

We should note that no gold escapes China, and that there are probably limited sales from Russia through Dubai, partly due to sanctions. 

Of their joint output of 680 tonnes, let us assume that 600 tonnes are not available to global markets, taking our supply number including scrap back to 3,600 tonnes.

It is in this context we must look at demand. 

Official figures from the Shanghai Gold Exchange show that 2,000 tonnes were withdrawn last year. 

Let us assume that 200 tonnes of that total came from China’s mines, leaving 1,800 tonnes of supply yet to be accounted for. 

According to the USGGS, central banks “and other institutions” bought 690 tonnes, leaving 1,110 tonnes. 

The balance in LBMA vaults declined by 400 tonnes, leaving just 710 tonnes of mine output and scrap unaccounted for. 

A further 420 tonnes were stood for delivery on Comex, leaving us with only 290 tonnes.

According to the World Gold Council’s Indian office, Indian imports for the first ten months amounted to 630 tonnes — say 700 for the full year. 

Now we are digging into the accumulation of previously mined gold held in above ground stocks to the tune of 410 tonnes.

Between them, India and China account for a significant slice of global jewellery demand, purchased as quasi-money, which is why I have not gone down conventional route of estimating global jewellery demand. 

But there was undoubtedly substantial jewellery demand net of scrap throughout Asia elsewhere ex-India and China — another 750 tonnes?

If we pencil in that figure holders of bullion long-term holders will have had to liquidate 1,160 tonnes. 

The only significant offset is the reduction in physical ETF holdings, estimated by the WGC to be 244 tonnes, dropping the net liquidation requirement to 916 tonnes. 

It is also worth mentioning the recently created ultra-high net worth individuals and their family offices in India and the other high growth Asian economies who will have accumulated gold ingots for storage outside their domiciles.

However you cut it, the only way in which more gold will become available is by higher prices tempting existing holders to sell. 

But with the dollar already over-owned and its issuing government spiralling into an uncontrollable debt crisis, why buy dollars with gold? 

And if dollars are unattractive, so are all the other fiat currencies which take their cue from it.

Coming into 2024, the severe lack of available gold at a time of an increasing debt crisis is what’s driving the market. 

To this we can add the growing loss of credibility for the dollar from geopolitical developments, with the American led proxy war being lost in Ukraine and the crisis in the Middle East, proving that America is now powerless in that region as well.

The one shoe to drop is the extraordinary disinterest shown by western consumers, exemplified by the reduction in ETF holdings. 

It is said that they hold less that 1% of their assets in portfolios, estimated to be worth up to $150 trillion. 

Just to add 1% at current prices is the equivalent of over 23,000 tonnes.

If gold is resuming its upward trajectory, the western investment crowd will become not just curious, but likely to panic buy, particularly as the twin horrors of their bankrupt governments and geopolitical policy failures strike home.