As the Federal Reserve continues to raise its benchmark rate, some analysts are predicting a debacle for the price of gold. However, the king of metals, although it has had a correction, has not had a crash due to the fact that the physical demand remains extremely high.
The price in the futures market may influence the price in the immediate future. However, in the medium and long term it is the physical demand in the real gold market determines its greater upward trend. This becomes more relevant because the “scarcity” of gold is fueled by the voracious appetite for that metal on the part of Asian countries.
But let’s review the numbers.
According to the World Gold Council, central banks as a whole bought 399 tonnes of bullion in the third quarter of this year, nearly double the previous record. However, less than a quarter went to public institutions that openly disclose their holdings, fueling speculation about who the mysterious anonymous big buyers of the other 300 tons of gold are.
Few countries currently have the capacity to undertake purchases of this magnitude.
One of these countries is China, which has the need to find an alternative to dollars as tensions with the United States increase following the measures taken against its semiconductor companies. Furthermore, the Russian invasion of Ukraine has demonstrated Washington’s willingness to sanction central bank reserves.
In 2015, China revealed an increase of almost 600 tons in its bullion reserves, but since 2019 its central bank has not reported any change in its gold holdings. Well-documented sources we track in this space have revealed that the People’s (Central) Bank of China is secretly buying gold even through military channels. In fact, so far this year it has imported 902 tons of gold, already exceeding last year’s total.
China is also the world’s leading producer of gold, but does not export its production. That is, to. Despite producing a lot of ingots, the demand is so great in that country that they have to import larger and larger quantities of the fine metal.
Russia, meanwhile, is also a massive gold buyer who spent six years stockpiling bullion before the pandemic.. This country is the third gold mining nation in the world, producing about 300 tons a year.
Before February 2022, it exported the metal to trading hubs like London and New York, but since Ukraine’s invasion, Russia’s gold is no longer welcome in the West, while China and India have been reluctant to import large amounts. This raises the possibility of the central bank stepping in to buy those supplies, but Russia’s overall foreign exchange reserves, including gold, have dwindled this year.
On the other hand, oil exporters such as Saudi Arabia, the United Arab Emirates and Kuwait have made big profits on crude prices and some have been investing in foreign assets through sovereign wealth funds, so it is certain that they have turned to gold. also to diversify.
Saudi Arabia has the largest gold holdings in the Arab world, but has not reported any change in its holdings since 2010, and even an accounting difference caused its reserves to double to 323 tons.
As for India, the central bank has already made large purchases of gold, and one of them went to the International Monetary Fund in 2009 for 200 tons. Since then it has tended to buy more gradually, but it should not be lost on the fact that, for a long time, India was the main consumer of gold over China.
It may have avoided buying large amounts of gold this year given pressure on its currency, and this has been exacerbated by heavy imports of precious metals for its consumer sector in recent months.
FIND OUT: Global shortage of physical silver triggers overpriced currencies
Who then is the mystery gold buyer and why?
Gold is the toughest asset to own if the Federal Reserve keeps raising interest rates, while stocks are the worst place to be. In fact, a measure that reflects well the situation of these assets is the empirical duration.
Duration measures the percentage change in an asset in reaction to a one percentage point change in interest rates.
Gold has had an empirical duration of 3.2 years in the current Fed cycle, compared to equities of 7.1 years and currencies that make up the G10 of 5.3 years. This highlights the sensitivity of equities and currencies to any perceptible changes in interest rate spreads.
In a nutshell, duration analysis shows that gold is a safe haven in the currency cycle, so the “big whales” (like those in the “crypto” world) are hoarding gold like never before and causing a shortage. of physical metal in the West that is unprecedented. The future is in Asia, and anyone who wants to successfully survive the changing economic-financial trends of this century should imitate those nations.
Editor’s note: This text belongs to our Opinion section and reflects only the author’s vision, not necessarily the High Level point of view.
MORE NEWS:
William Beard Master in Economics from the Austrian School; liberal, gold market specialist and editor of the investment newsletter Top Money Report