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What Makes This Gold Market Rally Different From All Others?
Michael Kosares
October 9, 2019

1. It is led by institutions and funds, not private investors. Global quantitative easing created a huge and mobile pool of capital in constant need of a place to call home. As the need for a safe haven became apparent among the stewards of that capital, the demand for gold flourished. The consistent presence of funds and institutions as buyers in this rally, as represented by the growth in ETF stockpiles, is one of its hallmarks and represents one of the major differences between this gold rally and rallies of the past. Though private investors have been late to the game, the rapid development of the physical market for gold coins and bullion in the United Kingdom is testament to the fact that sentiment can change quickly.

2. Day-to-day price reversals often originate in Asia and Europe, not just the United States. For decades, the U.S. commodity markets set the tone for gold pricing and the rest of the world was content to follow. Even the old London price fix tended to follow along with trends established in the United States. That all changed when the Shanghai gold market began offering its own pricing mechanism and the effects of Brexit began to have a profound impact on both sides of the English Channel. Now, price reversals often begin in Asian or European markets overnight and carry over to the open in New York rather than the other way around. All of this is a reflection of ramped up global investor interest in gold and a leveling of the playing field in terms of who and what influences the price on a daily basis. As such, it comprises our second important difference between the current gold price rally and rallies in the past.

3. Central banks are buyers of physical gold, not sellers. In 2011 something unusual happened in the gold market. Central banks flipped from being net sellers of the precious metal to net buyers reversing a 40-year trend. Since then, the official sector has added 4,563 metric tonnes to their coffers (through the first half of 2019) – a 15% gain in stockpiles to 34,407 metric tonnes. The gold that central banks take off the market, though, is only part of the story. The rest has to do with how domestic production in two key producing countries – China and Russia (the world’s number one and three producers) – is treated. Both countries channel their mined metal into national reserves rather than selling it in the global marketplace. Many analysts see this new and evolving approach to gold reserves as the key difference between the present gold rally and rallies of the past.

4. Bullion banks are covering their shorts on price retreats, not piling-on. Declining global interest rates have put a damper on another traditional source of physical gold supply – bullion bank leasing programs. “We can conclude,” writes gold market analyst, Alasdair Macleod, in an insightful paper published at the GoldMoney website, “that the basis for highly geared interest rate arbitrage by borrowing gold is running into a brick wall. Not only is there no incentive for lessors but also there is also a diminishing appetite for lessees because the opportunities are vanishing. Synthetic gold liabilities are being gradually reduced, not only by ceasing the creation of new obligations, but by buying bullion to cover existing ones. This will have been particularly the case when the USD yield curve began to invert in recent months (itself a backwardation of time preference), and was the surface reason, therefore, that the gold price moved rapidly from under $1200 to over $1500.” This change in direction for bullion banks represents another fundamental difference between this rally in the gold price and rallies of the past. What’s more, given the entrenched low-rate environment, it looks like it might remain a factor for some time to come.

5. Yields in economically important parts of the world are negative, not positive. Negative interest rates are a reality in both the European Union and Japan, and Alan Greenspan said recently that it is “only a matter of time” before they spread to the United States. One of the arguments against gold over the years has been that it costs money to own it. Now it costs money to own euros and yen, and before too long it might cost money to own the dollar as well. The advent of negative rates is perhaps one of the more profound differences between this gold rally and rallies of the past. It might also prove to be the most enduring. “One of the reasons,” Greenspan added in that same CNBC interview, “the gold price is rising as fast as it is – you know, at $1500 a troy ounce . . . What that is telling us is that people are looking for resources they know are going to have a value 20 years from now, or 30 years from now, as they age and they want to make sure they have the resources to keep themselves in place.”