Large Buyers Underpin Gold

Central banks are believed to be buying when the price dips

Central banks and investors have routed gold bears in recent weeks. Other precious metals, notably silver, platinum and palladium have also benefited from the change in market sentiment.
“It’s too soon to call a bull market, but the undertone is constructive,” says Ross Norman, the CEO of Sharps Pixley, a London bullion house. “The price must first break US$1,300 an ounce, but the key level is US$1,360 as three times in recent years, the price has failed to break that level.”
He believes that the downside of gold is limited as central banks are believed to be buying when the price dips.

Gold has been in a wide trading range of around $1200 to $1365 an ounce since 2016. The price is threatening to break through $1300 an ounce, the first barrier. The key level is $1365 as the price failed to get through that level three times. Price support for gold now appears to be above $1250.

Central bank activity in the bullion is kept secret but significant buyers in recent years have been Russia, China, Turkey and to a lesser extent India.
The World Gold Council, a producer body, has compiled statistics from the International Monetary Fund (IMF).
It found that in the five years ended 2018 the Bank of Russia bought 1,068 tonnes (34.3 million ounces) from its own mines and on the market. This compares with 516 tonnes in the previous five years.
Russian officials have admitted that geopolitical and a decision to be less dependent on the US dollar, are key reasons.
China has not been transparent so the IMF’s reported purchases of 1,243 tonnes are probably understated. Besides the central bank, the military and other government bodies buy gold. India has built up its gold reserves to 592 tonnes, Kazakhstan, 345 tonnes and Turkey 253 tonnes.

The coiled golden spring in August 2018

The turnaround in precious metals began in the autumn of last year and from its low point of US$1,175 an ounce, gold has risen by 9.6 per cent to US$1,288, silver by 11.8 per cent to US$15.60 an ounce, platinum by 4.4 per cent and palladium, a tiny market, by a whopping 35 per cent.
There were massive bear positions in US gold futures and options in August and those derivative sales contributed to pushing gold down to its worst levels in 2018.
The US Commodity Futures Trading Commission (CFTC) showed in mid-August last year that hedge and commodity funds’ net gold shorts – bear positions in futures and options on US derivatives exchanges – totalled 77,273 contracts.
Since each contract represents 100 ounces of gold, the net bear positions were equivalent to 7.73 million ounces.
To put this number in perspective, this was equivalent to 11 per cent of annual global jewellery demand. As the price bottomed out, funds were forced to cover their shorts, causing prices to rise.
Indeed, by Dec 18, the CFTC showed that the hedge and commodity funds had become bulls with net long positions 24,569 contracts equivalent to 2.46 million ounces.

As price rallied traders became more optimistic

Several banks, including Goldman Sachs and Standard Chartered, have become more optimistic.
They take the view that the US Federal Reserve Board will backtrack and refrain from raising interest rates in a slack US and global economy. In these circumstances, the dollar could weaken and boost the international gold price
Also, since the US and other stock markets’ upward momentum has, for the time being, been broken, alternative investments such as precious metals have become more attractive.
The Hulbert Gold Newsletter Sentiment Index, however, indicates that bullish sentiment of gold is now at very high levels. The newsletter believes that is a contrary sign that the market is overbought and prices could fall back.

Intriguing Platinum trends

Generally, silver and platinum tend to move in similar trends to gold, but they are more affected by industrial trends.
One of the precious metals’ more intriguing aspects has been the price behaviour of platinum.
The metal became popular in the early 1970s as it and its sister metals, palladium and rhodium began to be used in car catalysts to cut pollution from vehicles.
For most of the 40-plus years since then, platinum, which is also popular in jewellery and has attracted investors, traded either level or at a premium over both gold and palladium.
In recent years, there has been a reversal. Since 2014, platinum has traded at a discount to gold and at current prices of US$808 an ounce, it is US$480 cheaper.

For almost 50 years platinum traded level ior at a premium to gold. The discount is a relatively new event. Source: World Platinum Investment Council

According to Trevor Raymond, director of research at the World Platinum Investment Council, the motor industry decided to use a greater proportion of palladium in vehicles that run with petrol in the 1990s as it was then much cheaper than platinum.
But over the past 15 months, platinum has also traded at a discount to palladium which at a price of US$1,316 an ounce, is currently US$508 more expensive.
“The sustained palladium price premium over platinum is likely to help platinum demand,” Mr Raymond says. “Auto companies might consider increasing the amount of platinum used in autocatalysts and apply less palladium.”
The question is whether the part substitution would lift prices. Platinum has been the key metal in car catalysts of diesel engines and demand for those vehicles has fallen because of a scandal relating to Volkswagen and other German manufacturers, which understated pollution from their vehicles.
All the metals in the platinum group are dependent on the strength of the car industry in a global economy that is slowing down. Also, electric and hybrid cars are gaining popularity.

© Copyright Neil Behrmann
This article was first published in The Business Times, Singapore. Neil Behrmann is London correspondent of The Business Times. Jack of Diamonds his thriller on global diamond mining and smuggling, has recently been published. It is the sequel to the thriller, Trader Jack, The Story of Jack Miner.
See reviews of both books in :

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