What’s Old is New: Unraveling Gold’s Recent Price Spike
· Gold is an asset which is rare, not replicable, and is no one’s liability.
· Given the recent spike in the price of gold, we delve deeper into how these intrinsic characteristics of the metal might be affecting its recent price action and its future trading direction.
Gold’s Price Spike
In the last six weeks the price of gold has risen from $2,050 per ounce to $2,350 per ounce. Usually, the price of gold fluctuates with capital flows into or out of physical gold backed exchange traded fund (ETFs) and the positioning of speculators in the gold futures market. As such, we would have expected the recent rise in the price of gold to have coincided with an increase in ounces held in gold backed ETFs and/or a marked increase in the net non-commercial futures position in the gold futures market. Neither of these factors have materialized.
To put it bluntly, we don’t know for certain what is driving the recent spike in the price of gold.
The Timeless Value of Gold
Given this dynamic, we thought that it might be helpful to reexamine the intrinsic characteristics of gold which have made it an attractive financial investment over the past three millennia, and we then hypothesize as to how these characteristics might be driving the price of the metal today. Please find our thoughts below.
· Gold is rare: Being a chemical element, pure gold can only be found in nature. Compared to other metals, it’s occurrence in the earth’s crust is scarce. To illustrate this, gold occurs within earth’s crust at 0.0004 parts per million compared to copper’s occurrence of 70 parts per million. This scarcity, along with its characteristics of being easy to store and transport, have made it a means of exchange and a store of value for individuals and families for time immemorial.
Chinese and Indian consumers are now the largest retail consumers of the metal. In 2023, Chinese consumer demand for physical bars and coins increased by 28% from 2022, while demand for jewelry increased by 10%. Given the recent uncertainties in the Chinese economy, and more specifically in its real estate market, perhaps Chinese consumers are increasingly looking to physical gold as a means of saving and a store of value.
· Gold is no one’s liability: Cash held as US Treasury bills (or short-term bonds of other countries) are loans that need to be repaid by the US government. If the US government determines that it cannot or will not pay back that loan, then the holder of those Treasuries loses its entire investment. This is exactly what happened when the US and European Union member countries determined that they would not repay Russia on its $500 billion of foreign currency reserves held in Treasuries and short-term bonds of EU countries. Other central banks have taken notice of this effective confiscation and have dramatically increased gold holdings since this transpired. Central banks have bought over 1,000 metric tonnes of the metal in both 2022 and 2023 up from an annual average of approximately 450 tonnes in the prior ten years. China is by far the dominant central bank buyer as it diversifies it $3 trillion of foreign currency reserves into an asset which is no one’s liability and therefore cannot be digitally seized.
· Gold is not replicable: Unlike fiat currencies, gold cannot be created at will. Since the start of COVID, the Federal Reserve has digitally created $3.5 trillion to buy various financial assets. This unprecedented rush of liquidity into the market caused inflation in the US which we have not experienced since the 1970s. As inflation stays sticky despite much higher interest rates, risks to a reacceleration of inflation persist, and the prices of other assets classes rise, perhaps high net worth investors around the world are buying physical gold as means to hedge against a further devaluation of their fiat currency-based savings.
Although we cannot pinpoint the exact source, it is apparent that there is a lot of interest in gold. Given the recent decline in ounces held in gold-backed ETFs, it would seem that the source of the demand is for physical metal. This source of demand has been driven by, and we think will continue to be driven by the intrinsic characteristics of gold which have attracted savers for millennia. As these characteristics become more apparent to the broader market, we expect more demand to materialize and the price of gold to rise even further.
Gold’s journey through the ages serves as a testament to its enduring value and appeal. As we navigate a world of digital currencies and fluctuating economies, gold remains a steadfast symbol of stability and security. To learn more about how we invest in the future of gold, email us at invest@gabelli.com and a member of our team will be in touch.
Christopher Mancini
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©Gabelli Funds 2023
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This whitepaper was prepared by Christopher Mancini. The examples cited herein are based on public information and we make no representations regarding their accuracy or usefulness as precedent. The Research Analyst’s views are subject to change at any time based on market and other conditions. The information in this report represent the opinions of the individual Research Analyst’s as of the date hereof and is not intended to be a forecast of future events, a guarantee of future results, or investments advice. The views expressed may differ from other Research Analyst or of the Firm as a whole.
As of June 30, 2023, affiliates of GAMCO Investors, Inc. beneficially owned
