The World Gold Council's latest data released on April 16th shows that despite the Federal Reserve's interest rate hikes in March leading to higher interest rates, a stronger US dollar, and a stock market rebound, which are unfavorable factors for gold, concerns such as the ongoing Russia-Ukraine conflict intensifying economic growth risks and inflationary pressures have supported gold.
The Russian Gekras有色金属 plant in Krasnoyarsk is currently casting gold bars.
Data indicates that in March, the total holdings of Chinese gold ETFs rose to 61.8 tons, an increase of 2.4 tons from the end of February. Additionally, with the listing of three new Shanghai gold ETFs, the scale of China's gold ETF market has further expanded. From a global market perspective, the report also shows that global gold ETF inflows in March were 187.3 tons, a significant increase of 105.7 tons compared to the first two months of this year (81.6 tons), reaching the largest scale since February 2016. Among these, demand from the Chinese market was the main driving force, with inflows into Asian gold ETFs in China accounting for over 60% of the total inflows.
Apart from the Chinese market, Americans are also currently buying and hoarding gold coins. According to the latest data released by the US Mint on April 14th, the sales volume of the institution's Eagle gold coins in the first three months of this year was 984,300 ounces. This means that in just three months of 2022, 80% of the annual sales volume for 2021 (1.2 million ounces) has been achieved, far exceeding the 845,000 ounces of 2020. Moreover, according to the World Gold Council's report, the total demand for gold bars and coins in the United States in 2022 is expected to reach 4.25 million ounces.
This indicates that an increasing number of Americans are placing more emphasis on gold coin savings rather than direct ownership of physical gold to cope with uncertainties such as uncontrollable inflation and a decline in the purchasing power of the US dollar. Market analyst Neils Christensen also emphasized the potential advantages of the gold market in a report published on April 10th, stating that gold prices will stabilize at the level of $1950 amid the continuous decline in US bond prices. Societe Generale also stated that in its multi-asset portfolio, the position limit for commodities is 10%, half of which is gold.
The purchasing power of the US dollar continues to decline.
We have noticed that, in addition to market investors' love for gold, this corrosion-resistant precious metal still plays an important strategic role in the international reserve assets of central banks worldwide. Although the global central banks' total gold holdings decreased by 6 tons in February due to Uzbekistan's significant sale of gold, the total gold purchases by central banks still reached 36 tons. In 2021, global central banks net increased their gold holdings by 463 tons, an increase of 82% compared to 2020, and they have net purchased 2,390 tons of gold in the past five years, reaching the level of the year when the US dollar was pegged to gold. Especially since the Russia-Ukraine conflict in March this year, the pace has noticeably accelerated, and we will see this change in the report to be released by the World Gold Council next month.
Among these, the purchasing power from emerging economies and the European market is the strongest, with Turkey and India being the main buyers. Even Ireland, from the developed market, has been purchasing gold for two consecutive months. The report also points out that more than 21% of central banks plan to continue increasing their gold holdings in the next year, while this proportion was only 8% in 2019.
Regional conflicts, the COVID-19 pandemic, the decline in the value of the US dollar, hedging against tail risks of US dollar assets, rising debt levels, and inflation are the main reasons for investors worldwide, including global central banks, to buy a large amount of gold. This also directly indicates that gold still plays the role of a trust anchor in the monetary and foreign reserve systems of global central banks. As shown in the figure below, over the past hundred years, the US dollar has lost 97.3% of its value against gold.
The financial team also noticed that the demand for and import volume of gold in the Chinese market have also increased significantly. According to the latest data released by the World Gold Council on April 16th, in March, the gold outflow from the Shanghai Gold Exchange was 104 tons, a 12% increase month-on-month. According to the latest data released by Chinese customs, China imported 180 tons of gold from January to February this year (113 tons in January). Last year, China's gold import volume was as high as 818 tons, an increase of 120 tons compared to 2020. This means that from the beginning of 2021 to the end of February 2022, a total of 998 tons of gold have been delivered to China according to the data announced through official channels.According to the latest report released by the World Gold Council on April 3rd, the explanation is that against the backdrop of the United States using the dollar as a tool for economic sanctions or causing some U.S. debt buyers to hesitate, the returns on bonds will become increasingly poor in the future, and may even lose their risk diversification and hedging capabilities. Central banks around the world are turning to diversify international reserve assets and reduce dependence on the dollar, and are using gold as a means of diversification and security, making the global official gold reserves reach 35,616.5 tons (as of the end of February), the highest level in nearly 30 years, indicating that gold plays a significant role as a haven in times of regional conflict crises.
The working method of the gold vault management personnel of the Central Bank of Russia
Subsequently, according to a Bloomberg report on April 12th, an indicator measuring the total return on U.S. debt has fallen by 8.5% so far in 2022, and with the increase in investors' bets on faster and more rate hikes by the Federal Reserve, this indicator is expected to record the largest annual decline since at least 1973, which also means that the 40-year bull market for U.S. bonds has come to an end.
The World Gold Council stated that the low yields on bonds may limit their ability to respond to safe-haven events, and investors may also consider gold and cash as a viable hedging option. According to the stress test model updated by the MSCI Risk Management Team on April 11th, if U.S. inflation remains around 8% in the next two months and economic data indicators show signs of recession, then the investment return on U.S. debt may drop by 13% to around 5%, and at the same time, the risk of selling U.S. debt has also spread to the bond markets of Japan, Australia, and New Zealand.
All of this indicates that gold is returning from the periphery of monetary history, and people around the world are looking at gold to hedge the risks of dollar exposure. It is clear that gold is no longer a peripheral asset or investment, because the macroeconomic environment of the U.S. economy is the monetization of debt and the devaluation of its currency. Although the U.S. Treasury and the Federal Reserve believe they can control this process, experience tells us that they cannot, and the Federal Reserve cannot print gold.
We believe that this may bring about significant changes in the gold market since the United States closed the gold exchange for dollars and the dissolution of the Bretton Woods system in 1971. For example, Kansas in the United States recently proposed a bill (HB2123) to make gold and silver legal tender with the same currency function as the dollar through legislation, which is unexpected for investors. At this critical moment, another unexpected event has occurred in the U.S. financial and gold markets.
According to a follow-up report cited by the Russian media RT two weeks ago, the gold stored by various countries (international organizations) in the New York vault has never been physically audited, which has led to suspicions that the Federal Reserve may have sold or leased most of the gold through futures gold to make a profit. The Russian media further stated that the Federal Reserve may have repeatedly prevented Germany, China, Turkey, Venezuela, and other countries from repatriating their gold. However, some experts have said that the ownership of these gold reserves is very clear, and the Federal Reserve has no right to prevent or refuse investors from countries including China from repatriating their own gold, nor dare they embezzle these gold reserves. However, against this backdrop, there has been new progress.
The Federal Reserve seems to have responded to this in a latest report released a week ago. The report shows that the amount of gold currently kept by the Federal Reserve for central banks around the world has fallen to a new low of 57,381.5 tons, while two months ago this figure was 57,500 tons. This means that about 12 tons of gold have disappeared from the vault, or have been withdrawn from the United States by foreign central banks.
New York Federal Reserve Bank gold reserve flow
Subsequently, the President of the Central Bank of Poland stated in a special interview with the Polish media Strefa Biznesu that he has been arranging plans to transport the remaining 123.6 tons of gold in the United States back to the country (the country had transported 100 tons of gold from overseas in November 2019), and hopes to increase its gold holdings by another 100 tons in 2022, which has once again shocked the gold market.The global gold ETFs, including those in China, the trend of Americans stockpiling gold to combat high inflation, and the significant increase in gold imports by global central banks may all be sending a clear investment signal. What is often overlooked by readers is that during the period of global economic expansion, gold, as the world's top commodity, flows to various parts of the world. However, as the trend of fragmented economies increases and the risk of regional conflicts emerges, this flow is likely to reverse in the future. At that time, gold will increasingly flow as a vital strategic resource towards strong economies. In fact, the latest report published by the World Gold Council has already confirmed this logic. Meanwhile, global central banks are also jointly reassessing the strategic value of gold.