After sliding by almost 9% in six trading days from its early-March peak of $2,070 to touch a low of $1,895 in mid-month, gold has been trading in relatively thin conditions in a sideways range bounded by $1,890 and $1,944. The past week has seen it confined within those boundaries and testing neither (all prices intra-day).
The primary forces, of course, have been the persistent war in Ukraine territory on the one hand, and markets’ concerns about the battle that the central banks are having to wage in an effort to stave off stagflation. The United States economy looks comparatively resilient, but Europe is still mired with problems, themselves exacerbated by the issues over energy supplies in the face of the hostilities to the east. All of this is turning into something of a zero-sum game, especially with Shanghai now locked down and restrictions on travel in Mainland China. These are constraining physical gold demand in the country, which from 2019 averaged a total domestic demand of 941tpa, 31% of the world total. In 2020 and 2021 it dipped to 641t and 995t respectively, also 31% of total.
Looking forward, this suggests that, as usual, and as we saw last year when the virus went into remission, there will be potentially substantial pent-up demand when the situation reverts to something like normal. The next World Gold Council Quarterly Gold Demand trends will be released in four weeks or so and will give us a quantifiable idea as to Q1 activity. Meanwhile the Council published a piece in late February remarking on the strong rebound in 2021 and notes an increasing interest in jewellery among the younger generation, increased pricing transparency and more intense efforts by “local commercial banks to sell physical gold products” because of restrictions on their other gold businesses. At least one bank suspended deferred precious metals transactions on some accounts last October because of increased price volatility in precious metal prices, and some banks suspended the opening of new accounts for precious metal investment products as of November. On the downside, meanwhile, is a general reluctance to spend, and concerns over domestic economic growth overall. The Two Sessions meeting (the annual policy-making meeting), held in the first half of March, saw the Government prioritising economic stability in the face of downward pressure.
On the other side of the world, demand for coins and small bars, especially silver coins in the United States, is extremely strong, with coins commanding high premia as the U.S. Mint (and others) is struggling to get hold of enough metal to satisfy demand. The figures for coin sales for the first three months of this year therefore do not tell the full story. Sales of U.S. Gold Eagles were 155,500 ounces in March, compared with 66,000 in March 2021, 151,500 in March 2020 and just 15,000 in March 2019; while silver Eagle sales were 1.08M ounces against 4.09M ounces in March 2021, 5.48M ounces in March 2020 and 850,000 in March 2019.
The geopolitical uncertainty continues to help support gold while the markets are fighting shy of an increasingly likely 50 basis point hike from the Fed in May; on the other hand the yield curve keeps flipping in and out of inversion, which points to market uncertainty over the economic outlook. Thus we still have gold outperforming silver, and the ratio is again approaching 80.