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Gold Price Climbs Amidst Record Central Bank Buying and Tensions in the Middle East

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The spot price of gold rocketed past $2,400 per ounce in Asia this morning, topping out at $2,429.70 before the tamp down by the Wall Street after the New York opening bell. By afternoon, the price had settled down to around $2,342, $87 lower.

While consumers in China have been buying up small gold beans, the People’s Bank of China (PBOC), the country’s central bank, has been buying vast quantities of gold over the last couple of years while simultaneously dumping US Treasury Bonds and dollars.

Even though gold prices continue to trend upwards, consumers demand for gold in the United States keeps getting stronger.

An analyst from Wells Fargo estimates that Costco is likely selling between $100 to $200 million worth of gold each month. Based on the typical premiums that Costco prices their gold products, that’s somewhere in the range of 43,500 to 86,000 troy ounces per month.

By comparison, APMEX, one of the largest online bullion dealers has annual sales of around $2.4 billion, which is also around $200 million per month. A-Mark, one of the largest precious metals wholesalers, which owns JM Bullion, Provident Metals, BGASC and others, reported $9.3 billion in sales in its 2023 annual report.

Some industry analysts have speculated that China has taken over control of the gold price since the middle of 2022. In 2023, the PBOC bought roughly 735 tonnes of gold, a 23% increase over the record breaking buying of 597 tonnes in 2022.

Additionally, the Chinese government has created strong consumer demand for gold, particularly for younger generations that view gold as safe haven amid ongoing economic uncertainty.

Costco has limited their precious metals products to mostly 1 troy ounce coins and bars. With prices continuing to test record highs almost weekly, a more affordable investment option that many investors turn to is fractional gold bars and coins.

The US Mint issues the American Eagle Gold coin in three fractional denominations of 1/2 oz, 1/4 oz and 1/10 oz. Each of these fractional Gold Eagles shares the same design, purity, recognition and trust as the 1 oz coin, but are minted in smaller denominations that are more accessible to a wider range of investors.

These coins are minted in mass quantities by the Mint and are extremely liquid with an expansive amount of bullion dealers and others paying cash for gold.

Fractional gold bars are available in many different increments. With available sizes as small as 1/2 gram. However, the premiums for the smallest sizes can be relatively high. While denominations containing 5 grams or 10 grams of gold per bar can offer significantly lower premiums.

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Shanghai Gold Price Ends the Year over $2,100 per ounce

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The gold price, along with that of other precious metals, is largely driven by commercial bankers and brokers involved in the trading of commodities in various futures markets throughout the world. The three largest gold trading markets are in London, New York and Shanghai.

In the US, we typically track and trade gold based on the New York gold price that is part of the market managed by COMEX and the CME Group. For decades, the price of gold in New York has been heavily manipulated by the large commercial Wall Street banks. This has been well documented in recent years, with many traders from JP Morgan Chase and others having been convicted.

Corruption by members of the LBMA and COMEX and price manipulation on a global scale has been one of the issues brought forth by the BRICS alliance as a leading driver of dedollarization in recent years, which has led to a growing number of local currency trade agreements. These new trade agreements are instead backed by central bank gold reserves and not the petrodollar.

This week, the Shanghai Gold Price topped the $2,100 per ounce resistance, closing the year at a record breaking $2,118.20 per ounce, the highest price per ounce in history.

The Shanghai Gold Exchange is one of the largest physical gold trading exchanges in the world. Established in 2002 in Shanghai, China, it facilitates the trading, clearing, delivery, and storage of gold and other precious metals. The SGE plays a significant role in the Chinese gold market, and has become of the the most influential gold markets globally.

China is a both a major consumer and significant producer of gold. The SGE, being the primary gold trading platform in China, reflects the country’s demand and supply, influencing global market perceptions and, subsequently, prices.

As one of the largest markets for physical gold, the demand and supply dynamics in the SGE can have a ripple effect on global gold prices.

Unlike the New York and London exchanges that trade primarily in paper gold derivatives and futures contracts, the SGE deals largely in physical gold.

This focus on physical gold can lead to different price dynamics compared to markets where paper gold (gold futures and derivatives) is traded.

As gold prices in various markets diverge, more gold miners and refineries are likely to ship more product to markets where they are likely to get a better price. This is likely to lead to further draining of gold from the LBMA and COMEX managed vaults.

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Gold’s Return to the Economy

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Globally, the dollar has been used as a reserve currency by central banks. Since the 1970s, the petrodollar has been utilized for the trade of oil and energy.

Over the last two decades, elected officials in Washington have weaponized the dollar for political purposes.

In recent years, central banks have been dumping the dollar for gold.

BRICS countries have grown frustrated with the dollar’s hegemony in the global market. In 2022, Russia launched the Moscow World Standard to compete with the LBMA, citing ongoing corruption, price manipulation and enforcing trading practices rooted in nepotism and exploitation of developing countries.

The economic sanctions against Russia and the decades of sanctions against Venezuela are two examples of recent weaponization of the dollar that has raised skepticism of some trading partners outside of the European Union.

Russia, and trading partners Venezuela and Peru, account for 62% controlling stake of the world gold bullion.

Part of the western sanctions against Russia forced the LBMA to reject six of Russia’s key Good Delivery refineries from the exchange. The Moscow World Standard is positioning itself as an open alternative to the LBMA.

Many have accused the LBMA and other western countries of manipulating and suppressing the price of gold and other commodities by pushing the practice of trading in paper derivatives. The Moscow World Standard prices gold in ruble and bans the trading of paper derivatives and encourages new price discovery which could push the price of gold to over $2,500 an ounce.

Some see the rise in demand by central banks buying gold as a signal that countries that have been bullied by Western economic policies as being eager for an alternative system that will create a more equitable system and fairer monetary standard.

The Moscow World Standard was developed by the Eurasian Economic Commission, a coalition of countries that include: Armenia, Belarus, Kazakhstan, Kyrgyz Republic and the Russian Federation.

Western sanctions against Russia have led some countries to reconsider bilateral trade in non-dollar currencies for the first time in decades. China, Russia, India and Iran already have an ongoing effort to establish alternative payment and settlement systems that parallel the SWIFT banking network. Iraq has reportedly begun paying for imports in the yuan, while China has been encouraging use of it’s Cross-Border Interbank Payment System (CIPS).

China quickly became Saudi Arabia’s largest trading parter, with more than 1.76 million barrels of crude oil per day and the Shanghai Petroleum and National Gas Exchange will be enabled to handle the renminbi (RMB) for settling oil and natural gas trades which is adding to the decline of the dollar hegemony.

Long term, the BRICS+ countries are creating competition in the global marketplace for raw materials and commodities that is attempting to break the chains of the LBMA and similar price control organizations.

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New Global Gold Standard Emerging from Recession

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The dollar emerged as a reserve currency following World War II as part of the Bretton Woods Accord. This was due to the United States having the largest gold reserves at the time. Bretton Woods provided fixed gold prices that was pegged to the USD making it the central spoke for trade.

NPR did a report in 2019 that gives some history on the Bretton Woods agreement, the development of the World Bank and International Monetary Fund or other organizations involved in evangelizing the use of the dollar in international trade.

More About Bretton Woods

In 1971, economic conditions were not entirely different than they are today. At the time, the economy was suffering from a relatively high rate of inflation, the ongoing war in Vietnam led to significant budget deficit and mounting debt, and there had been a longstanding decline in the U.S. monetary gold stock, and a recent, sharp rise in external dollar liabilities held by central banks.

Corruption in government had also reached a tipping point which later led to Watergate, the Church Committee and other investigations.

In August of 1971, Nixon held a top-secret meeting at Camp David with his top financial and economic advisors that included the likes of Arthur Burns, John Connally, Paul Volker and others.

Together they created a strategy for a controversial policy that removed the dollar from the gold standard which disrupted the global economy.

Long term, the decision to remove the dollar from the gold standard led to a decline in central bank holdings that reached the lowest point around 2010.

Since the financial crisis in 2008, Central Banks have been following the lead of BRICS nations and continued their gold buying streak in 2022. Globally, central bank holdings have now reached their highest point since 1974.

The Biden Administration faces additional problems today that didn’t exist in 2008.

Russia began exchanging rubles for gold and requiring foreign nations to pay for gas and oil in rubles to flout US sanctions. Some of this has been factored into gold prices this year.

Recent news of Qatargate involving the arrests of several prominent members of the European Parliament is more evidence of the corruption ingrained in the dollarized financial system.

Although the origins of Bitcoin remain up for debate, the original cryptocurrency also developed in response to the 2008 Global Financial Crisis that resulted from the US recession.

Cryptocurrency ledgers provide a shared and public transaction record that could provide central banks with more transparency.

However, the adoption of CBDC as proposed by the G7 as a programmable currency is fraught with controversy. Much of this causes confusion with consumers who are already struggling with mass adoption of crypto.

The recent crash of the FTX crypto exchange highlights significant issues of corruption within the current system that continues to spread to other sectors of the economy. plus the evidence of the emergence of a global BRICS currency backed by the combined gold reserves of member nations are just two of the additional challenges.

Discussions of a BRICS mixed basket currency began to emerge following the global financial crisis in 2008. Which was triggered by lax lending standards, record amounts of consumer debt and other factors that fueled the first housing bubble.

BRICS countries have been in discussion to establishment of a new digital reserve currency that is a mix of member countries.

The BRICS reserve basket currency allows member nations to engage in trade bypassing the USD. The strength of their local currency will help to strengthen their influence in the basket.

Some economist see this as a real threat to the dollar as a global reserve currency, thus reducing the demand for dollars worldwide.

On a macro level many of these things are seen as good indicators of strong demand and long term upward movement in gold prices.



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BRICS, Central Bank Gold and Oil

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BRICS is loose term created by Goldman Sachs to represent the world’s five leading emerging economies. The original list included four: Brazil, Russia, India and China. South Africa was added to the list in 2010.

Combined, the BRICS nations represent 3.21 billion people, roughly 41.5% of the global population.

Over the last year more stories have emerged in the news about the desire for BRICS nations to seek an alternate currency to the US dollar for their international trade. Often referred to as de-dollarization. The removal of the dollar as the reserve currency used in international trade.

Russia has already established the Moscow World Standard to compete with the LBMA and other legacy markets.

In response to economic sanctions following the invasion of Ukraine, Russia’s gas agency began demanding payments for oil and natural gas in Rubles.

Russia’s Central Bank began exchanging gold for Rubles and many countries are now trading oil on a new gold-standard.

The PBoC, the central bank of China continues adding gold bullion to its reserves and holdings.

Worldwide central Bank gold holdings have now reached their highest point since the 1970s.

The 1970s was a time of global economic crisis. Following the oil crisis of 1973, Nixon led the collapse of the Bretton Woods system as part of his measures to fix the stagnant economy.

Nixon resigned in August of 1974 following the Watergate Scandal. Days later, President Ford signed legislation which repealed Roosevelt’s executive order restricting private gold ownership.

This global appetite for gold has the potential to give emerging nations an advantage over the value of their assets and international trading dynamics.

Many emerging nations are rich in oil, minerals and mining. Some of which are necessary components in the development of batteries, solar panels and other advanced manufacturing.

Private ownership of precious metals now continues to grow every year. During the pandemic, from 2020 until 2022, investors bought more than 75 million troy ounces of American Silver Eagles.

The US Mint has been unable to keep up with investor demand which has caused premiums to rise.

Over the same period gold investors bought more than 5 million troy ounces of Gold Eagle and Gold Buffalo coins.

Government silver coins from Canada, United Kingdom, Austria have become popular alternatives for investors looking for lower premiums.