In recent weeks thegold exceeded expectations, recording a sustained price rally that recorded record after record. “While the weakening dollar, due to the Fed’s expected dovish policy changes, is a key driver, the dynamics behind the surge are more subtle.” I am the one who affirms this Ned Naylor-Leyland And Daniel Marchfund managers Gold & Silver – Jupiter AM Of Jupiter AMwhich below explain these dynamics in detail.
Gold has already digested the Federal Reserve’s downgrading of monetary policy easing prospects in 2024. Despite this, it is continuing its upward trajectory. This suggests that other factors are at play, such as the return of significant demand for physical gold, particularly from China and the Middle East. This wave of physical buying could be driven by a confluence of factors, including inflationary concerns and rising geopolitical tensions in the Middle East.
There China has become one of the most important buyers of gold in the world. The China Gold Association (CGA) reported that the country’s gold consumption in 2023 amounted to nearly 1,090t, an increase of 8.73% from the previous year (China’s young generation powering gold rush – Chinadaily.com .cn). Another indicator of overall gold demand in China, the Shanghai Gold Exchange (SGE), reported a 95% (year-on-year) increase in demand in January.
The marked demand for gold in China is also demonstrated by the “Shanghai Premium”, a measure that calculates how much physical gold costs in China compared to the international spot price. The “Shanghai Premium” reached the record level of 100 dollars an ounce last year and has stabilized in recent months at 30-40 dollars an ounce. Significant appreciation in the Far East opens up interesting opportunities for “bullion bank” internationals who can buy gold in London or New York and sell it in China – a structural driver of gold demand moving around the world.
Behind the record demand from China, an interesting demographic shift is taking place. Younger buyers, aged 25 to 34, increased their share of overall gold purchases from 16% to 59% in 2023. The decline in the stock market and local real estate values contributed to the increase in younger generation, but it is the form of investment that indicates the true nature of demographic change. Younger buyers in China are choosing to purchase 1g gold beans to preserve long-term wealth.
While China is seeing a surge in demand for gold, silver is in the spotlight in India. Last month, India imported a record 70 million ounces (~2,200 tonnes) of silver, with silver pellets accounting for more than half of total imports. India’s choice to import granulated silver suggests that the silver is likely destined for industrial uses, with recent plans for a gigafactory of electronic vehicles (EVs) perhaps a likely destination for unprecedented silver flows into the country (the plans of gigafactory of India’s EV batteries could spur “black mass” imports and cut exports, Lohum founder said – Fastmarkets).
The reduction in import duties through the Indian International Bullion Exchange (IIBX), established in July 2022, has likely contributed to the surge in silver flows, with February’s record flow representing an unsustainable ~8% of the total annual supply of mines in a single country. Aside from industrial uses, India still imported over 30 million ounces of silver from London last month, suggesting a shift towards the cheaper of the two metals, with a still high gold-to-silver ratio (GSR), close to 90/1.
While we continue to see record demand for gold from China and record flows of silver to India, we have yet to see the largest investment flows from Western buyers. Popular exchange traded funds (ETFs) have seen steady outflows over the past three years, as investors have chosen to overlook metals and chase trendier technology and AI sectors. In recent weeks, however, popular physical ETFs have started to experience inflows (particularly silver, see below), suggesting that investor sentiment may be shifting back to the asset class. If sustained investor flows return, we expect a further sustained rise in the price of gold. As a result, we watch this subset of investors with interest.
