Gold Demand Hit 11-Year High in 2022
Gold demand grew by 18% to 4,741 tons in 2022, the highest demand in 11 years, according to data compiled by the World Gold Council. Massive central bank purchases coupled with strong retail investor buying and slowing outflows from ETFs drove overall demand higher. Gold demand last year was on par with 2011, “a time of exceptional investment demand,” according to the WGC. Central banks bought 1,136 tons of gold last year. It was the second-highest level of net purchases on record dating back to 1950. It was the 13th straight year of net central bank gold purchases. Central banks added 417 tons of gold to their reserves in Q4, bringing the total in H2 to 862 tons. This was due to a combination of reported buying by central banks in Turkey, India, Uzbekistan, and many other emerging markets, along with an estimate for significant unreported buying. Central banks that often fail to report purchases include China and Russia. Many analysts believe China is the mystery buyer stockpiling gold to minimize exposure to the dollar. Meanwhile, the Chinese central bank officially waded back into the gold market after going silent in 2019. The People’s Bank of China reported 62-ton purchases in both November and December, raising its total gold reserves to over 2,000 tons for the first time. According to the World Gold Council, there are two main drivers behind central bank gold buying — its performance during times of crisis and its role as a long-term store of value. It’s hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers and at an accelerated pace.” Investment demand for gold was also strong in 2022, totalling 1,107 tons, a 10% increase year-on-year. Gold bar and gold coin demand grew by 2%, building on strong demand in 2021. In total, global investors bought 1, 217 tons of gold bars and coins. The second half of the year was particularly strong for bar and coin buying, charting two successive quarters of demand of around 340 tons for the first time since 2013. According to the WGC, “The need for wealth protection in the global inflationary environment remained a primary motive for gold investment purchases.” Investors in the West had a particularly strong appetite for gold and broke an annual record. Combined US and European purchases of gold bars and coins hit 427 tons. That exceeded the previous record of 416 tons set in 2011. Institutional investors who primarily buy and sell paper were not as bullish on gold last year. Despite rampant price inflation, they bought into the narrative that the Federal Reserve was going to win the inflation fight. They sold gold every time the Fed hiked rates. As a result, gold ETFs charted outflows of 110 tons. That was an improvement over the 189-ton outflow in 2021. The World Gold Council summed up the duelling narratives in the investment market. As well as underlying support from geopolitics, gold investment was impacted by a combination of multidecade high inflation, especially in Western markets, and the resultant aggressive rate hikes by the Fed and other central banks. Bar and coin investors focused on the former and sought the safety of gold as a hedge against inflation. In contrast, gold ETF investors reduced their holdings, especially in the second half, focusing on gold’s rising opportunity cost as central banks across the globe imposed hefty rate hikes and the US dollar surged.” Gold jewellery demand softened in 2022, falling 3% to 2,086 tons. Rising gold prices in the fourth quarter drug down demand. Demand for gold in technology saw a sharp Q4 drop, driving a full-year decline of 7%. According to the WGC, “deteriorating global economic conditions hampered demand for consumer electronics.” Gold used in the electronics sector fell 18% y-o-y to 58 tons during the final quarter of the year. According to the World Gold Council, it was the largest quarterly y-o-y fall in the sector since 2009 – a direct consequence of the unprecedented combination of challenges the industry is currently facing. The gold supply was up modestly, rising 2% on the year, with mine production inching up 1% to a four-year high of 3,612 tons. Even with the rebound in mine output, it still hasn’t recovered to the 2018 record. Now that the COVID-19 production disruptions and widespread China safety stoppages of 2021 have reversed, this lack of production growth gives further credence to claims that gold production is close to plateauing.” Here’s how the World Gold Council summed up gold’s performance in 2022. Gold’s diverse uses, in jewellery, technology and by central banks and investors, mean different sectors of the gold market rise to prominence at different points in the global economic cycle. This diversity of demand and self-balancing nature of the gold market underpin gold’s robust qualities as an investment asset.” Article courtesy of SchiffGold
Bank of America: Calling the Death of Gold Is Premature
Gold posted a small gain in 2022, and it was one of the best-performing assets of the year. Nevertheless, there is still a perception in the mainstream that gold is dead. But that perception may be changing. In a recent note, Bank of America commodity strategist Michael Widmer said gold will be a “mainstay” in portfolios over the next several years. The yellow metal faced significant headwinds in 2022. The Federal Reserve’s “war on inflation” meant higher interest rates and a strengthening dollar. Widmer said these dynamics have “prompted some soul-searching among market participants” when it comes to gold. However, we think calling the death of gold is premature.” Wilmer said he is bullish on gold in 2023 and he thinks the bullish environment will persist for several years. The macro backdrop is turning bullish gold; taking a longer-term perspective, our analysis also confirms that the yellow metal can be a potent portfolio diversifier.” What exactly is that macro backdrop? Bank of America head of US economics Michael Gapen said he anticipates a mild recession in 2023 and that easing inflation will allow the Federal Reserve to pivot away from its tight monetary policy. We anticipate the recession will be mild by historical standards, lasting two to three quarters before resolving by the end of the year. With inflation falling and unemployment rising, we think the Fed could begin to cut its policy rate beginning in December 2023.” Peter Schiff agrees that there is a good chance the Fed will cut rates this year. And he thinks there is an even better chance the central bank returns to quantitative easing, whether it cuts rates or not. But Schiff said the Fed won’t pivot for the reason mainstream analysts such as Gapen think. It won’t be because of a victory in the war against inflation. No. They’re going to surrender. Inflation is going to win that war. The Fed is going to run to fight another battle — at least it’s going to try to fight because it’s going to lose that battle too. That battle is going to be a recession, maybe financial crisis, maybe a battle to try to prop up the US government whose insolvency is becoming a bigger problem with rising interest rates.” But no matter the reason, any Fed pivot is bullish for gold, and that’s why Wilmer thinks investors will have renewed interest in the yellow metal. Gold is a non-yielding asset, so tighter monetary policy raises opportunity costs, which in turn does not provide an incentive to increase exposure to the yellow metal. This has been a reason why price movements have been so muted in 2022. That said, we outlined in the past week that the macro-economic backdrop is now increasingly bullish gold, which meant that outflows from ETFs have subsided.” With the big run-up of bitcoin over the last couple of years, many people proclaimed gold was dead. But Wilmer noted that gold and crypto are now following very different trajectories and have become essentially uncorrelated. The BoA note also referenced the recent surge in central bank gold buying and pointed out that some countries are diversifying away from the dollar. Gold can serve several functions, including serving as a means of payment and a store of value. It also mitigates counterparty risk. With the world becoming multi-polar, the latter point is important for central banks, especially in emerging markets. To that point, in the run-up to the war in Ukraine, Central Bank of Russia had reduced USD holdings while at the same time boosting exposure to gold.” While I find Bank of America’s macroeconomic analysis lacking, we end up drawing the same conclusion – the Federal Reserve will take its foot off the accelerator and return to loose monetary policy. After all, the global economy is built on easy money, debt, and money creation. It simply can’t operate without it. As Jim Grant said, “Certainly, the slowing rate of the rise in inflation is to be celebrated. It’s nice, but we are still left with a system that is inherently inflationary.” At the end of the day, inflation and loose monetary policy are bullish for gold. Article courtesy of SchiffGold
What should I think about when buying gold bullion?
In South Africa, the ideal way of investing in gold bullion is Krugerrands. While there are a number of pros for owning gold in the form of Krugerrands (recognisability, history, ease of acquisition, legal tender status, and so on), the immediate and chief advantage is undoubtedly the price. Simply stated, it is the cheapest available gold bullion product on the South African market. While price considerations are undoubtedly very important, there are other factors that should influence your decision pertaining to what form of gold bullion you should purchase. Stated in the form of a question; what are the advantages of purchasing international bullion coins instead of Krugerrands? There are three that I think are important to be aware of. The first relates to the advantage of taking the gold out of the country in the case of a holiday or emigration. The current regulation, as per the South African Reserve Bank’s website, is as follows: Banks may allow the export of Krugerrand coins or the equivalent in fractional Krugerrand coins up to an amount of R30 000 as gifts by residents to non-residents (www.resbank.co.za). However, currently, there is no legislation preventing owners from taking gold bullion coins issued by other countries (legal tender) out of South Africa. The only rule is that it would have to be below R1 million in value, or, part of the R1 million yearly allowance. So, in the case of leaving the country, therefore, it seems more practical to own international gold bullion that is easily transferrable and does not require long administrative procedures. Secondly, international gold bullion coins are the cheapest way to own gold that is easily ‘exportable’. The cheapest gold coin that may be classified as a collectable/numismatic coin that is not considered to be part of the R30,000.00 export restriction, is the proof Krugerrand (minted by the South African Mint). The current price of a 1 oz proof Krugerrand is just over R43,000.00 (the 2022 price, not the 2023 pricing which is not yet determined). Other 1 oz gold coins are R47,000.00 Big 5 Series). Therefore, it seems that it is financially prudent to diversify into international gold bullion coins as well. This is the case at least from the perspective of paying the lowest premium per oz of gold that is not under the current export restriction. Thirdly, VAT should not be seen as a deterrent, since both gold Krugerrands and international bullion coins have a market-related price within the South African bullion investment market. It is this market-related price that is important, not the pricing composition. A Krugerrand is bought VAT free, but when it is sold, VAT is not recovered. Inversely, if an international gold bullion coin is bought with VAT, it is then recovered when it is sold. In conclusion, I wanted to state categorically that I am not advocating abandoning purchasing Krugerrands. Rather, it is my personal opinion that it makes a great deal of practical sense to diversify into international gold bullion coins, especially if emigrating or taking gold out of the country is within your future realm of possibilities. Article courtesy of Silver-Sphere
Counterparty Risk and How to Minimize It
One of the benefits of owning physical gold and silver is there is no counterparty risk. You’ll often hear people talk about government bonds as a “risk-free” asset. That’s because you’re guaranteed to get your money back – as long as the government exists and remains solvent. Since governments rarely just disappear or default on their debt, there is an extremely low likelihood you will lose your investment in a government bond. But that likelihood isn’t zero. Therefore it is not truly a “risk-free” asset. In fact, government bonds share one characteristic with most investment assets; they come with some level of counterparty risk. What exactly is counterparty risk? In a nutshell, it is the risk that a person or institution on the other side of a transaction might not fulfil its obligation. Consider government bonds. When you buy a bond, you assume the government will pay interest and return your invested money at the end of the bond’s term. But a government could be overthrown, or it could accumulate so much debt that it can’t repay all of its bondholders. That’s the counterparty risk. Most investment transactions come with some degree of counterparty risk. When a company issues stock, that company could go bankrupt. That’s counterparty risk. Even government-issued fiat currency has counterparty risk. People who have old Zimbabwe banknotes know this to be true. Gold and silver have no counterparty risk. In fact, if you own physical gold or silver, there is no other party involved. No counterparty means no counterparty risk. Precious metals don’t depend on any people or institutions to give them value. Nothing behind gold and silver can fail to render them valueless. In a nutshell, gold and silver are liquid under all market conditions. Gold and silver are tangible assets that you can hold in your hand. They can be bought and sold all over the world. Their value is recognized globally. While the price of gold or silver may fall, it will never fall to zero. Precious metals can’t default on their payments, they can’t commit fraud, and they can’t go bankrupt. When I say gold and silver have no counterparty risk, it’s important to remember that I am talking about physical gold and silver that remains in your possession. If you buy a gold or silver ETF (paper gold and silver), you assume that the issuer of the ETF has the physical metal to back the paper on hand. It may or may not, and that introduces counterparty risk. You also take on counterparty risk when you store your gold and silver with a third party. It is possible for that third-party storage entity to commit fraud, get robbed, or be destroyed by an act of god. While the counterparty risk introduced by storing your gold and silver with a third party is relatively low, it does exist. You have to weigh that risk against the risk of storing large amounts of metal in your home. In a world fraught with counterparty risk, holding physical gold and silver as part of your investment portfolio will help you hedge against that risk. Article courtesy of Michael Maharrey, SchiffGold
