Gold Trickles Down for Seven Months Straight

Gold trickles down for seven months straight, despite massive demand for coins and bars from central banks and individual investors.

Key Takeaways:

  • Price premiums on physical gold products are hitting records as investors pour into the physical market.
  • However, the gold price continues to fall as institutions play with the paper markets and dump their exposure to gold-backed ETFs.
  • For long-term gold investors, this means three things: entry points, entry points, entry points.

Gold Demand Dynamics

The World Gold Council reported total gold demand 1,181 tons in Q3 this year, a 28% increase from last year. Central bank reserve purchases, jewelery, technology, and investment demand are all included in this figure.

Last quarter, the investment sector was the most interesting of the group.

Investment demand is split into two categories: bars and coins (physical gold), and gold-backed ETFs (paper gold). Physical gold investment increased by 36% year-over-year, although total investment demand actually decreased by 47% because of the 227 tons of ETF outflows.

In other words, investors are dropping paper gold and picking up physical gold.

It is easy to see why gold-backed ETFs would get caught up in the rest of the market plunge. Investors trade ETFs on the same platform as all their other investments, which makes it easy to dump their paper gold shares along with stocks and bonds.

However, safe haven demand for gold is stronger than ever. Central banks and individual investors who rightly see economic turmoil in our future are stacking up on physical coins and bars.

Central bank gold purchases just hit a quarterly record 400 tons. Product premiums on physical gold products have been surging for months, which means wholesalers do not have enough product to meet demand.

Entry Points, Entry Points, Entry Points

Despite strong physical demand, gold has fallen for seven months straight.

A strong U.S. dollar and rising interest rates continue putting pressure on the price. Long-term gold must see these dynamics as an opportunity rather than a threat. Temporary price dislocations driven by the paper gold markets provide excellent entry points.

Remember, gold dropped 34% from March 2008 to November 2008, in the wake of the global liquidity crunch. After that, gold exploded 183%, finally peaking in September 2011.

Paper vs. Physical

Gold investors need to understand the dynamics between paper gold and physical gold. In the good ol’ days, owning gold meant actually holding the metal in your hand. No fractional reserves, no derivatives, no paper claims to non-existent metal.

Modern finance allows investors to play all sorts of games with gold investing. If something really does break, like it did in 2008, people will be scrambling out of the paper markets and into the physical markets.

Judging by the investment trends over the last few months, the transition has already begun.

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As always, thank you so much for reading – and happy investing!

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Additional Resources:

Gold Demand Trends Q3 2022 (World Gold Council)

To Solve Inflation, First Solve Deficits, This Theory Advises (Wall Street Journal)

Extreme market events put regulators to the test (Financial Times)

Who Are The Mystery Buyers Responsible For Central Bank Gold Boom? (Yahoo Finance)