“Gold may continue to outperform other haven assets, with an added tailwind from central bank purchases and also displaying its characteristic as an inflation hedge,” -from ZH's Gold,The Currency Of Last Resort
“We are bullish Gold in 2023” is how Goldman’s most recent, 2nd most-clear gold trade desk idea opened on Wednesday, January 4th. We say second because the most clear idea was on November 14th which we discussed in a Founders Podcast entitled Buy Season Preview: Goldman’s Latest on Gold and what it meant then. We recommend listening to that later if your interest is in seeing this report in context
Today we aim to go through their latest report in detail.
How We Got Here and Where We’re Going
The institutional report starts by laying out recent and expected future drivers of precious metals on both the buy and sell side of the table.
Throughout 2022 we saw ETFs selling gold and Asian physical demand from either central banks or retail soaking it up
Note: We do not think they mean retail futures people soaking it up. They mean retail physical investors. The impact of retail Stackers on the market is no joke.
WESTERN SELLING, WHY?
That’s pretty clear and needs little elaboration except to answer the question Why did ETFs sell? That answer from us is: The West has been a seller of Gold and Silver in ETF form ever since they sought to hedge exposure from rate hike regime implementation for inflation control starting back in April. The evidence of this has been well documented in this space. Deflation of (precious) stock valuations had translated into selling of Precious Metals1.
Related topic: Gold Buy Season
BRICS BUYING, WHY?
The East has been a buyer to diversify their FX reserves in preparation for what is (almost) certainly going to be a complete bifurcation of trade and money flows in the future. The evidence to that effect is in CB buys over the last year.
The rationale for hoarding a pet rock which does nothing that materially contributes to economic growth explodes with irony when thought about at the central banker level. Do you want to keep doing business with trade partners you also do not trust to take your eyes off for a second? Then you need Gold.
The evidence we don’t see as easily but know is true, is that they2 are also buying Silver hand over fist as part of the Brics coin basket of commodities, of which Silver is one of the most important as both a store of value and as a generator of economic growth.
Total Known ETF holdings liquidation timeline …
One insight gleaned is confirmation of our long held understanding that physical players do not chase the market.
Some physical players also anecdotally indicate that they would like the prices back lower near 1700 as that should result in the physical premium widening aggressively.
Some evidence of this is in how the Silver EFP traded in backwardation in selloffs, but normalized in rallies. We have nothing else to add to that except to say they are forthright in their comment.
Forward Looking Catalysts
The banks' second point is prescriptive for market behavior as a function of monetary policy going forward. They believe either the Fed pivots too early and turns dovish before inflation embers are truly extinguished, or they pivot too late (something breaks3) and cause a much bigger recession which will in turn necessitate the Fed having to rescue the stock market. In doing so, gold benefits tremendously.
They also comment on the least bullish scenario in which the soft-landing actually materializes:
There is that soft landing path in the middle which is probably not as bullish but the chances of that coming to pass are low in [our] opinion.
They discount its effect/likelihood using the 2018 ending rate-hike cycle in which Gold still rallied 20% soon thereafter. A comment is warranted here.
IMPORTANT RISK COMMENT
We would add with high importance that their second scenario of pivoting too late, while ultimately bullish for Gold as they show, has also historically been bearish for gold in the extremis as people panic-sell everything (Covid onset) not tied down until the Fed rescues things.
January is Gold’s best month gaining an average of 2.06% the past 29 years…
The point of this is between the pivoting-too-late scenario, and the panic-rescue that would ensue, you may get a massive dip that will conspire to shake you out of Gold and Silver longs subject to any leverage you used. Deflation sinks all boats in absolute terms, Gold less so, but enough to make you do something stupid if levered. Which is probably why they suggest options for a trade expression later on.
CURRENCY OF LAST RESORT
Their final point is an explanation on why the central bank buying that got us here will continue.
Third point is Central banks increased need for a politically neutral asset from a geopolitics stand point especially post Russia-Ukraine war and resulting sanctions.
To sum it up from our previous analysis: Covid, supply chain fragility, war, and Sanctions have all laid bare the reduced globalization undercurrent we have been experiencing since the GFC occurred.
The response to this is fragmentation of trade, rising mercantilist policies, and a new multipolar monetary regime to accommodate the 2 new trade blocks. Which all means nations need money that does not play favorites and has no counterparty risk if they wish to continue doing trade in a world with greatly diminished trust. In short: Stackers are right and have been right since 2009. Central Banks are stackers. Speaking of Stackers…
Comment: Silver Just Right
Silver is not a “B” player in this. It simply cannot be used as money in a literal sense at CB level for reasons gone into prior in this space. It is too important. Simply put, it is Gold’s uselessness that makes it perfect as money4. It is Silver's usefulness that makes it harder to use at the CB level. But sovereign wealth funds and BRIC nations know otherwise.