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Strange times in the gold market


Gold bullion has been setting new record highs in London’s bullion market: gold has been off to the races this week and last. In GBP terms bullion prices broke out of the important resistance level of £1600/oz on 29 February. At time of writing gold bullion was trading at £1670.

Because gold pays no income, record price levels in gold bullion could be vulnerable to central banks like the US Fed or Bank of England saying they plan to keep interest rates higher for longer to try putting a lid on inflation. But a pull-back isn’t guaranteed, and any dip in the gold price could prove a good opportunity to buy into the precious metal’s underlying strength.

Regular readers of our premium Armchair Trader Plus+ commentary will know we have maintained a long gold position for months. As of the end of January that was already moving well into positive territory.

Asian demand for gold is running hot

While this latest jump in gold prices has come on a jump in speculative betting, physical demand for gold from the key consumer markets of China and India continues to run hot. Central-bank gold purchases also remain historically strong, and that’s clearly helping drive up the gold price. Again led by China and India, gold demand from sovereign nations shows no sign of receding as Moscow and NATO talk so openly about the risk of direct conflict.

“Yet again gold reinforces its diversification appeal with the new high reached today,” said Ruth Crowell, CEO of the LBMA said on Monday. “The yellow metal is currently performing even better than recently forecast by analysts in this year’s LBMA Annual Precious Metals Forecast Survey, whose average forecast for gold was $2,059.”

Western traders taking profit in gold

In contrast, Western investment demand for gold is running negative as existing owners take profit at these new record high prices. Private investors using have now been net sellers of gold for SIX months running, cutting their holdings 3.4% by weight since August’s record high, according to data from BullionVault in London. At the same time however, the value of the gold they continue to hold in secure storage – ready for instant sale the moment they choose – has risen 4.0% in UK Pound terms to £2.4 billion this week.

Coin and small-bar shops are seeing a flood of people selling back, and gold-backed ETF trust funds have shrunk to pre-pandemic size, with money managers and other gold ETF shareholders cutting their positions further on the metal’s new all-time highs.

For most people who choose to buy gold bullion, it appeals as a form of investment insurance, a way to offset long-term losses in other assets such as shares and bonds when the economy weakens or inflation rises. Anyone wanting to maximise their returns should pay attention to costs, security and convenience.

Small bars and coins can feel reassuring to hold in your hand, but the costs involved in buying and selling these retail products can run as wide as 10%, and keeping gold at home requires fitting a proper safe and paying higher home-insurance premiums.

Gold’s weird market

Gold is now trading in a very interesting market, with the profit taking seeming to have little effect when weighed against the wall of central bank money buying in the market. This includes some Asian central banks that are in the market, buying through proxies.

This has now been reinforced by further gold buying from Asian retail investors. Many Chinese investors have been moving into the gold market as property and stocks in China have collapsed. Conventional economic wisdom has been that gold should be less attractive in a market when interest rates are still so high, but this reckons without the new strength of Asian buying power in the gold market, especially in bullion.

In the West there is razor focus on US economic numbers, which are indicating that the Fed may be inclined to cut rates this summer. This could provide a further boost to gold prices.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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