When the markets are wild, gold bugs are usually left to sulk alone in the corner. It makes sense. One of the main reasons to own gold is as insurance against major disasters. Good times are rarely when gold shines.
However, in the first week of March, gold followed the Nasdaq, Bitcoin and other cryptocurrencies and – with much less fanfare and media attention – broke out to new all-time highs, topping $2,160 an ounce last week.
To be fair, in real terms, today’s gold price is well below the levels it reached in 2021, 2011 and, even more strikingly, 1981 (see chart below). The lack of “real gains” may help explain the lack of excitement surrounding gold’s current breakout.
On the other hand, the quiet nature of the gold breakout may illustrate Gavekal’s long-held belief that the price of gold is no longer set in London or New York as much as it is in Mumbai or Shanghai.
To see this effect, look at the chart below, which plots the market capitalization of GLD, the largest gold exchange-traded fund (ETF), against the price of gold.
As gold prices have risen to new highs in recent weeks, the fund’s market capitalization has shrunk. ETF investors were selling gold even faster than it was rising (perhaps to buy the new Bitcoin ETFs, which had an impressive accumulation of assets).
As Gavekal has long emphasized, much of the world’s demand for physical gold today comes from emerging markets. China and India together account for approximately two-thirds of global gold consumption, while the rest of Asia (Vietnam, Thailand, Indonesia, etc.) and the Middle East (Iran, Saudi Arabia, United Arab Emirates, etc.) ) together account for another quarter.
In short, while gold prices are widely believed to be driven by changes in US real rates or the movement of the dollar, developments in India and China are becoming increasingly important. On this front, two things seem clear.
First, India is experiencing a huge boom, both economically and in terms of asset prices. And as India goes through a period of accelerated wealth creation, isn’t it too hard to imagine a small percentage of the country’s newfound wealth finding its way into new jewelry purchases?
Meanwhile, in the Himalayas, China is facing tougher economic times, largely due to the unfolding real estate crisis. Against this backdrop, Chinese policymakers are trying to contain the fall in asset prices; a signal of falling interest rates and liquidity injections.
However, this was not enough to give impetus to the defeated animal spirit of China. Instead, cash deposits in Chinese banks continue to rise. So it would hardly be a big surprise if Chinese savers, despairing of local property and stock markets and bemoaning their low – even non-existent – interest rates, decided to seek solace in the comforting embrace of precious metals.
Moreover, before the recent price surge, the price of gold in Shanghai was trading at a premium of 2-5% to the price of gold in New York.
If, overall, today’s margin buyers of gold are in either India or China (see chart below), then the biggest threat to the unfolding gold bull market may not be what the US Federal Reserve does or doesn’t do.
Instead, the biggest threat is either that the Indian economy will go into recession, turning Indian buyers into sellers, or, perhaps counterintuitively, that the Chinese stock or real estate markets will bounce back quickly to become a destination again for Chinese savings.
At the moment, neither event appears to be unfolding. This suggests that the gold breakout is real and that it likely has legs.
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