Gold Prices

Last July, China added another 10 tons of gold to its reserves. This marked the eighth straight month of gold purchases for the red giant. And in November they upped the ante by adding another 32 tons.

524 tons flowed out of Switzerland alone to the People’s Republic last year. Though they only constitute around 3% of the global gold holdings, the pace of the buying is increasing. Since 2009, 12,000 tons have been accrued by China from around the world. Reserves have sextupled from 2006.

Turkey has been a buyer of gold every month in 2022. The World Bank has been a net buyer every year since 2009. And the pace is also increasing.

Worrisome could be distancing from dollar dependence. Gold prices have been creeping up of late, but another possible explanation might be tied to the simultaneous rise of Silver and Bitcoin. Silver and Gold have traditionally liquidated when equity Indexes decline, with prices declining accordingly. From January 2022, there has been a steady decline in these indexes.

Bitcoin joined this sell-off trend during the COVID slide.  With the massive equity holdings across the globe, whenever there is a market slide other assets are liquidated to meet margin calls and maintain reserves.

Usually, the first to go is emerging markets. This is quickly followed by sell-offs in both Gold and Silver. Gold prices have traditionally suffered during these periods. Today, all four of these markets liquidate with market declines. This paints a counterintuitive picture. One would think that these markets present a hedge against both inflation and a declining market.

But with massive corporate investing, emerging markets, Gold, Silver, and Bitcoin all sell off until a certain price or time threshold is reached. Usually, the price threshold for the end of the liquidation of metals is the market being off 37% from the top, this point has traditionally marked the turn-around were these metals will suddenly start rapidly outperforming the equities indexes.

To an extent, we also saw this with Bitcoin coming out of the COVID crisis into record highs.

 

We realize the equity indexes have not slid 37% from the top. But the threshold for the turnaround in metals can also be time. It could be that Bitcoin, Gold, and Silver have just reached the end of being liquidated to meet margin calls. Portfolios could have been otherwise repositioned to avoid sell-offs of other assets.

One fact stands out about Gold. “Big Money” in the Gold market has been defined by one thing, and one thing only. That one thing is not hedge-fund buying. Traditionally, the only entities that are able to move Gold are sovereignties.

Third, The US Dollar first shot up with inflation, being in a better position than most of the world currencies. But now reality has set in, and the Dollar is sinking into a realistic place in the context of its own inflation. The result dash Gold, Bitcoin, and Silver are being repriced higher.

So with all three of these factors in play, it would not be surprising to see Gold prices break out to the $2,500 level in the near future. Accompanied by Silver, this likelihood is much more confident.