Gold and silver’s inflection point
For decades goldbugs have bemoaned that paper markets control and suppress gold and silver. Many of them have yet to realise it, but London forwards and Comex futures no longer set the price.
MACLEODFINANCE
It is increasingly set by Chinese savers and their demand for physical metal.
In this article, I estimate the depth of Chinese demand for gold, and assess global demand for silver in the year ahead.
In gathering my evidence, I quantify China’s household savings, and point out that their alternatives to buying into rising gold values are few.
This is evidenced by householders building their bank deposits, and for them there is now a more exciting alternative — gold and also silver of which more to follow.
The quantities of gold to satisfy likely investor demand, and this will almost certainly be reflected in silver as well, are truly staggering.
Geopolitics reinforce the trend.
Chinese investors are certainly aware that their central bank is selling dollars for gold, and that the Communist Party’s official position is to eliminate the use and possession of dollars as much as possible.
They could hardly have a bigger hint from their authorities.
The background
It has taken nearly four years for gold to break out above its $2070 glass ceiling, first set in August 2020.
Interestingly, the 55-day moving average is not far behind and also rising strongly (currently at $2285) which suggests that the current consolidation — and there will be more of them from time to time — is likely to be minor.
There are two reasons behind this development.
The first is massive demand from China, and the second is a growing realisation that the dollar’s fiat days are numbered.
It amounts to the end of paper pricing in London and Comex.
Let’s look at Chinese demand first.
China has a notoriously high savings rate, only second to Singapore and estimated in 2022 to have run at about 46%.
What this means is that the estimated total of income and business profits not being spent on consumer and intermediate products which make up GDP measured by product output are being “saved” or invested.
It is credit being reallocated into non-GDP items and investments of all sorts.
In an $18.4 trillion equivalent economy output measured by GDP, that’s $8.5 trillion of savings.
Those savings go into property, capital for industrial production, government bonds, invested in stock markets or accumulated in bank deposits.
China is a special case in that investment abroad is restricted through strict licencing, and last year only $33bn was permitted investment in foreign factories etc.
That leaves $8.27 trillion bottled up in China.
Just 10% of that, if allocated into gold is the equivalent of over 10,500 tonnes of gold at today’s prices.
Another perhaps more focused way to look at it is to take the subset of household savings.
The estimate for the annual rate of household savings is 35% of GDP, according to OECD data.
This means that households are putting aside $6.3 trillion annually, in addition to their existing holdings of assets.
For households, the choice is broadly limited to property, the stock market, bank deposits, and gold.
Property is less popular because that bubble has recently been lanced.
The stock market has risen 7% this year so far after recent losses, so presumably a small proportion of total savings might be invested there.
That leaves bank deposits and gold.
So far this year, the most popular investment medium is certificates of deposits offered by banks, which with a three-year term give a yield of 3%.
These are regarded as the safest form of investment, some of which can be cashed in at short notice.
Investors’ preoccupation with bank CDs reflects deep pessimism.
Burned by the Evergrande property disaster, they know that backed by the state their bank deposits are at least safe.
Their memories of stock market performance are informed by the losses of the last three years, and they are yet to be convinced buyers.
But as long-term buyers of gold, it appears that they have latched onto its rising trend.
This is illustrated in my next chart:
I should add a little context.
Individuals were unable to buy gold before 2002, when the CNY price had already risen to CNY2,500.
However, if the chart had been on a logarithmic scale, it would have shown a relatively constant rise illustrated next
The pecked line is the logarithmic trend over time, which tells us that while the arithmetic scale looks scarily in need of correction, the logarithmic scale tells us that current prices are close to the long-term average trend in real terms.
And there can be little doubt that trend-chasing Chinese households with some $6.3 trillion (CNY46 trillion) to invest this year are observing the rising gold price with growing interest.
CNY46 trillion is over 80,000 tonnes of gold at current values.
And being just one year’s additional savings, possible reallocation from existing investments from less fashionable alternatives are an additional factor.
Obviously, it would be wrong to assume that savers will put all their eggs in a golden basket.
But the figures show that if Chinese investors continue to allocate just a small part of their savings into gold, the effect on gold’s value measured in yuan and therefore the dollar (nearly all this gold has to be sourced internationally) will be dramatic.
And it explains why even with the West selling, the gold price continues to rise dramatically.
China’s banks offer gold accounts to their customers, so it is easy for an individual typically investing at least CNY500 ($70) to switch bank deposits into a gold deposit account, as well as buying physical gold in high street stores, or dealing in gold on smartphone aps.
Additionally, futures are available on the Shanghai Futures Exchange to provide leverage for larger speculators.
It is clear that bullion demand is being driven through all these channels.
Chinese investors will also be aware of the government’s policy to do away with dollars as much as possible.
They will have observed how the Americans cut off Russia from SWIFT, effectively stealing her foreign currency reserves.
They will be fully aware of America’s increasing belligerence over Taiwan and targeting trade with China with tariffs.
While there will be internal critics of China’s anti-dollar policy, they dare not express their views.
And the saving masses will believe in the official line.
They will have also observed the Peoples Bank selling dollars to buy gold.
Above all else, this is the clearest of public signals.
Therefore, the conditions are set for savers to increase their buying of gold.
Other than bank deposits, for increasing numbers of ordinary people it is becoming the only investment worth considering.
The collapse of western government finances
It will be increasingly obvious to the Chinese people and those of allied nations that western government finances are in a mess.
Until now, they have probably given little thought to the matter.
But for any Asian who has a basic understanding that gold is money, and an unattached currency is not, he or she is bound to begin considering dollar basics.
The US Government has a debt to GDP ratio of about 130% and rising, while the Chinese government’s is at 23%, or 55% if you include local governments.
The level of the US Government’s debt ratio is increasing, with budget deficits not being reined in.
American delegations from the US Treasury to Beijing come and go, presumably hoping that China will buy dollars and more US Government debt.
At the same time, US politicians behave like imperialists, lecturing the Chinese for being undemocratic and undermining American production with cheap exports.
You don’t need to be the brain of Beijing to see how muddled the Americans are, and that China could even decide to get rid of dollars even faster than it is at the moment.
The US is imposing new trade tariffs of 100% on electric vehicle imports from China, and crippling tariffs on solar products, semiconductors, battery parts, and steel.
This week, Janet Yellen told EU law makers in Frankfurt that they would have to follow the US by restricting imports of Chinese green technology.
Doubtless they will, and the UK will come under protectionist pressure as well.
The consequence is that China will have less use for dollars and euros than they would otherwise have, and price inflation in these currencies will increase due to these policies alone.
It is hardly surprising that China, its allies, and their citizens are dumping dollars and US treasuries at an increasing pace.
In China and throughout Asia, a growing understanding of the consequences of trade protectionism as well as the deplorable condition of US Government and other G7 nations’ finances undoubtedly will be reflected in higher values for gold and silver.
Silver is demanded and in short supply
Traditionally, when gold is running, silver runs twice as fast.
In some up days recently, silver has risen more than this against gold, due to a squeeze on physical supplies.
The Silver Institute released its latest estimates for the demand-supply balance only last month.
It estimates that there has been a supply deficit for the last four years, totalling 828.1 million ounces, which is just short of annual global mining output.
And it further estimates that in 2024 there will be an additional shortfall of 265 Moz.
These shortfalls include a line item “Net investment in ETPs”, adding 50 Moz to the market supply shortfall of 215.3 Moz making up that 265 Moz deficiency.
These shortfalls are covered by existing bullion inventories being drawn down.
According to Metal Focus, identifiable bullion inventories totalled 1,278 Moz at end-2022, mainly held in loco-London or in CME depositories.
These have declined since due to supply deficits leading to a market which is now essentially illiquid.
Obviously, the estimate of 50 Moz net ETP investment demand is a best guess, as is investment of 212 Moz in physical coin and bar.
But these estimates cannot have included the consequences of Chinese investor demand on the back of a soaring gold price, being such a recent and not yet understood development.
The point is that throughout Asia silver is regarded as money just as much as gold has been in the past.
And if Chinese investors and speculators are drawn to buying gold, they will also buy silver, which for retail buyers appears to be more affordable.
In short, recent developments mean that demand for silver is being seriously underestimated along with that of gold.
The amazing thing about all this is that we westerners have no clue about the magnitude of these pent-up forces which are driving fiat currencies into oblivion.
It could lead to bans of gold ownership in the US and UK — bans on silver ownership seem less likely.
It could almost certainly lead to a crisis in London and Comex paper markets with participants defaulting.
If indeed that happens, it will only intensify the crisis driving gold and silver values even higher as the billions of people not in the West and not banned from dealing scramble to emulate the Chinese households and grab what metal they can.
0 comments:
Publicar un comentario