Gold, after setting another all-time high (ATH) went through a slight consolidation as a result of some investors taking profits. The basis for growth remains strong, and the level of $3,000 per ounce is realistic.
The week started with a continuation of the consolidation, lingering at around $2,650 since the end of September, to slide into minor correction on Tuesday ($2,610 after the US job market data). However, from Wednesday onwards, the gold price started to recover, finally returning on Friday to around $2,660 per ounce.
In terms of the Polish zloty, the chart shape was similar, but the amounts differed—we are still well above 10,000 zlotys per ounce, which for some represents a new reality with which they will have to come to terms, while others see it as a reason to take profits or hold off on purchases. Who is right? I don’t own a crystal ball, but many analysts from serious institutions, such as large investment banks, lean towards the first option—this is the new reality.
As for the latter, those waiting for gold to peak and start declining—they are the ones responsible for corrections after each and every ATH, cashing in their profits, which of course no one is stopping them from doing.
Gold ETFs start buying
Exchange Traded Funds (ETFs) backed by gold experienced a lengthy period of stagnation. These are the investors who are most susceptible to shifts in the price of gold as their intention is not long-term security, but rather speculation.
The period when inflows into gold-backed ETFs were less or even in the negative, was a time of great uncertainty. High prices on the one hand, and great uncertainty on the other, as to how the Fed will react in the face of inflation. This uncertainty was reflected in alternating periods of growth and stagnation. Central banks, not targeting speculation, consistently made their purchases. ETF investors waited or at least tried not to make hasty moves.
However, according to the latest data from the World Gold Council, we are seeing a reversal of this trend. Just in April, the outflows from the funds exceeded the inflows. Since May, inflows have been prevalent. Participation from North American funds is also increasing, which have been mostly recording outflows since May 2023, with a few exceptions. Last month, these funds added 16.2 tons of bullion to their reserves, of which 15.5 were in the United States alone.
This shows that even in a period of such high gold prices, speculatively inclined investors see potential for growth in gold. And—what is perhaps most important in all this—it is reflected in the purchases, not just in the forecasts.
The decisive factor was of course the lowering of interest rates by the Federal Reserve (Fed), and the fact that the cuts amounted to 50 basis points, encouraged investors to buy even more.
China has not bought gold for the fifth month in a row
COVID-19 UPDATE septembre 2022
Just a while ago, when I wrote about the consistent purchases of central banks, I left out the People’s Bank of China. It has not bought gold (at least officially) for the fifth month in a row. And before that, it was buying every month for a year and a half. What happened?
According to Wisdom Tree’s commodity strategist, Nitesh Shah, China wants more gold, but they are waiting for better prices. This explanation seems to be both accurate and incorrect. You would have to be quite bearish to expect better gold prices at this point, especially when supporting actions aimed at dedollarizing the global economy. After all, weakening the dollar will only strengthen gold.
Or, in line with the teachings of Sun Tzu, is it a ruse? Is it not really about the Chinese waiting for a better price? Perhaps they don’t want to weaken the dollar too much at a time when they still have a lot of foreign exchange reserves denominated in US currency?
And speaking of Sun Tzu, one should not forget the long-standing tradition of the Chinese buying gold “under the table” and not reporting their purchases. This would be very easy in a situation where China is already the largest producer of gold, and it is in alliance with Russia, which besides fossil fuels, has gold to offer.
We will probably find out what the Chinese are playing at in the future.
When will the Monetary Policy Council reduce rates?
We will also find out in the future when the Monetary Policy Council will cut interest rates. According to Henryk Wnorowski, a member of the Monetary Policy Council, a potential time for such a decision would be between the first and second quarters of next year. In March, the National Bank of Poland will have the latest projection, including any price increases at the turn of the year. We will probably also have the inflation peak behind us. We should expect calm cuts of 25 basis points.
This is slightly milder rhetoric than what was prevailing not long ago, which is probably due to the fact that banks in countries such as the USA, Switzerland, Denmark, Sweden, and the Czech Republic have already cut interest rates. Rates have also been lowered in the eurozone.
On the other hand, as of now, we are still dealing with rising inflation. In September it was 4.9% YoY, compared to 4.3% in August. We should not forget that there are also voices in the Monetary Policy Council about the necessity of raising interest rates (prof. Joanna Tyrowicz). So although high interest rates are a cause of inconvenience and can pose certain threats, on the other hand we have inflation, whose issue is still not settled.
The clear point in what is happening at around the National Bank of Poland are undoubtedly gold reserves. These, according to calculations (including those by Bankier.pl), may already amount to 420 tons, which places us in the group of leaders in buying gold. Considering that in 2018, our reserves were just under 103 tons.
Although the level of gold reserves may seem a somewhat abstract matter, since why should we rejoice at 420 tons of gold when we have high interest rates and inflation, they still provide a certain sense of security. We have larger gold reserves than the UK. As pointed out by Prof. Adam Glapiński, we already have about $200 billion in currency reserves, which is irrefutable proof of credibility and solvency to our trading partners and investors – also in times of deeper turmoil.
Michał Tekliński, gold market expert at Goldsaver.pl, Goldenmark Group
Source: https://managerplus.pl/amerykanskie-etfy-ruszyly-na-zakupy-58871
