This is an anomaly we haven’t seen before.
Gold just hit yet another all-time high. But what’s strange is that, if you look at gold’s supply and demand fundamentals, the price should almost be falling. Not rising.
I’ll explain—
On the supply side, gold production is actually increasing slightly. The largest miner in the world, Newmont Mining, produced nearly 30% more gold in the first half of 2024 compared to 2023. And across the entire industry (according to the World Gold Council), global gold mining output is up slightly over 2023.
So much for shrinking supply.
But what about demand? Well, this is usually broken down into four main segments.
The first and (by far) largest segment of demand is jewelry. But global jewelry demand is down.
Signet Jewelers (which owns major jewelry brands like Kay, Zales, Jared, Blue Nile, and many others) has reported an 8.5% drop in revenue so far in 2024 versus 2023. Meanwhile China’s Gold Association reported a 27% decline in gold jewelry purchases in the first half of 2024.
Even on the high-end side, LVHM’s jewelry division (which includes the luxury brand Tiffany’s) also reported a 5.1% sales decline due to “an uncertain economic and geopolitical environment. . .”
So overall jewelry worldwide (which is THE biggest component of gold demand) is down. Worldwide.
The next segment which drives gold demand is investment demand, i.e. individual investors who buy bars and coins… but most often invest via Exchange-Traded Funds.
Well, the largest ETFs in North America (GLD and IAU, which comprise 80% of the market) are DOWN for the year, meaning they have been net SELLERS of gold, rather than buyers. Even in the month of August, these two combined for a big fat whopping 1.7 metric tons of net purchases, roughly $200 million.
That’s nowhere near enough to move the gold price.
Meanwhile, across the Pacific, all of Asia’s gold ETFs COMBINED only purchased a net 0.3 metric tons (i.e. $30 million) last month. Again, this is simply not enough demand to move the gold price.
And so far for the year, worldwide, gold ETF holdings are DOWN by about 44 metric tons.
The third category of gold demand is industrial use. You might already know, for example, that there’s about 50mg of gold in your mobile phone thanks to gold’s unique chemical properties as an electrical conductor.
So mobile phone producers (along with certain medical device manufacturers and a handful of other industries) also buy gold. It’s pretty small demand, though— industrial and technology use only makes up about 10% of global gold demand.
That said, it’s worth pointing out that iPhone sales (which is a good proxy for global mobile phone production) are down substantially, from a peak of $48 billion in Q1/2021 to just $39 billion in its most recent quarter.
So, to summarize, jewelry demand is flat or down. Investment demand for gold is flat or down. Industrial demand is too small to matter, but even that is down. Meanwhile, supply is rising.
Rising supply and falling demand? It seems like gold prices should be falling right now. And yet gold just reached yet another record high. What gives?
Well, as we’ve said before, the answer is central banks.
Poland is a great example; despite being a relatively small country, it bought 19 metric tons of gold last quarter alone. And it plans to buy at least another 125 tons in the future. That’s a lot of gold.
This is a trend taking place worldwide; central banks including China, Turkey, Qatar, India, Czech Republic, etc. have loaded up on gold this year. And in the second quarter of 2024, central banks purchased 183 metric tons of gold… which is far more than usual.
Central banks typically buy small amounts of gold, i.e. a few metric tons here and there. But over the past two years, they’ve been buying gold like crazy.
It’s pretty obvious why. They’re concerned about the world, and they’re concerned about the fate of the US dollar and US government finances.
Think about it— central banks around the world own TRILLIONS of dollars worth of US government bonds, i.e. US dollar foreign reserves. And they’re obviously worried.
Congress and the White House run outrageous budget deficits every year. The federal government’s dysfunction is a constant national embarrassment. The US national debt is set to soar by AT LEAST $22 trillion over the next decade. And inflation is far from being solved.
Foreign central banks know this. And they realize that, in a few years time, their trillions of US dollar reserves will be worth a lot less.
So they’re trying to do something about it now. And that means trading at least SOME of their dollars for gold… hence the feverish central bank gold purchases, and the all-time record high in the gold price.
We’ve already suggested that gold could easily go much higher… especially if Kamala wins. I think that’s easily a $10,000 gold price, which would suggest only a small percentage of US dollar foreign reserves invested in gold.
That doesn’t mean the gold price can’t fall in the meantime. Gold prices have been rising for so long, and, realistically, nothing goes up or down in a straight, uninterrupted line.
Some central banks will continue buying gold irrespective of its price. Others will be more conservative and try to play the market. Singapore’s central bank, for example, actually sold a bit of gold recently and are probably hoping for a pullback in prices to buy more.
But over the longer term, gold is still an extremely sensible hedge with a lot of upside.
Having said that, the real value we see right now is in gold miners.
Look at Newmont mining— and, this is not a recommendation, but just an example. Newmont is the world’s largest gold miner, i.e. more than 80% of its revenue is essentially gold.
Gold is at an all-time high, yet Newmont’s stock price is about 40% below its record high from a few years ago.
Sure, it’s a much more complicated story; you have to consider gross margins and mining costs and country risk, etc. But the larger point is that gold stocks (especially relative to gold) are very cheap right now… especially when you consider where gold could be a few years from now.
