Central Banks Fuel Gold Rally While Western Investors Sit Out

As trading wraps up for the month of August, the gold market is set to record its highest-ever monthly closing price.

Gold defied expectations, in some circles, of a summer slump. The question seems to be how high the monetary metal will go heading into the fall. 

Metals markets will have the tailwind of a near-certain Federal Reserve rate cut next month. They may also start reflecting political fear and uncertainty as the November election draws nearer. The threat of a gathering economic storm precipitating a deleveraging event in the financial system also looms as a possibility.

For now, gold bulls are rightly feeling vindicated as spot prices currently come in at an impressive $2,514 per ounce. That reflects a slight loss now of 0.3% in this week’s trading.

Turning to silver, spot prices are down 2.9% this week to trade at $29.16 an ounce. Platinum is pulling back 3.5% to trade at $942. And finally, palladium is putting in a weekly gain of 0.8% to command $1,002 per ounce as of this Friday morning recording.

The white metals have been lagging behind gold throughout the summer. Frankly, they’ve been underperforming gold for years -- and in the big picture, for decades. 

A major reason why gold is outshining other metals is that it is being accumulated by central banks around the world, led by Russia, China, and others.

The People’s Bank of China reportedly paused its gold purchases earlier this year. At least one keen observer discovered it is nevertheless continuing to accumulate gold without publicly disclosing it. 

Data shows large imports continuing to go through the Shanghai Gold Exchange. Whether it’s central bank buying, other institutional orders, or purchases by individual Chinese consumers, China’s appetite for gold remains robust. 

Despite gold hitting record highs and commanding some attention in the mainstream financial media, investor demand has yet to really take off. Net assets in exchange-traded funds that track gold prices have barely budged. And buying of retail bullion products has been anything but manic so far this year.

As a result, inventories of coins, rounds, and bars are plentiful, while premiums on popular products remain low at low-cost dealers like Money Metals.

The fact that investor sentiment toward gold remains lukewarm at best suggests that there is still a lot of room for the market to grow to the upside – both in terms of public participation and spot prices.

But of course, the biggest upside potential can be found in the metals that are currently the most undervalued. 

Even at roughly $30 per ounce, silver remains well below its previous all-time high near the $50 level. That’s despite the fact that it is seeing rapidly growing sources of industrial demand in photovoltaics and electric vehicles. 

Meanwhile, mining supply isn’t growing at all – setting up the prospect of large supply deficits in physical silver. In 2023, the silver market posted a structural deficit of 184 million ounces. That deficit is projected to reach 215 million ounces this year. 

For more on the supply shortfall situation in silver, make sure to catch our upcoming interview with Philip Newman here in a moment.

Rising silver prices will, in theory, incentivize more production. But the costs of extraction are also rising. And the costs in terms of dollars and time of developing new mines is prohibitive. 

S&P Global estimates that it takes an average of 20.8 years worldwide to develop a new gold mine. The time-frame is even longer in the United States. It’s also longer for copper, nickel, and other base metals – which often produce silver as a byproduct.

There are few primary silver mines in existence. And since most mined silver is immediately consumed by industry rather than held by central banks or individual investors, above-ground scarcity can quickly turn into a panic-inducing shortage.

When the silver futures market does finally adjust to the reality of a chronic supply deficit, we could see a price spike to new records, and beyond, that makes the magnitude of gold’s current bull run look modest by comparison. 

********