Gold has always held an allure. The earliest civilisations used it for jewellery; the first forms of money were forged from it. For centuries kings clamoured to get their hands on the stuff. Charlemagne conquered much of Europe after plundering vast amounts of gold from the Avars. When King Ferdinand of Spain sent explorers to the new world in 1511, he told them to “get gold, humanely if you can, but all hazards, get gold.” Ordinary men also clamoured for it after James Marshall, a labourer, found a flake of gold while constructing a saw mill in Sacramento, California, in 1848.
People are once again spending big on the precious metal. On April 9th its spot price hit a record of $2,364 an ounce, having risen by 15% since the start of March. That gold is surging makes a certain degree of sense: the metal is seen to be a hedge against calamity and economic hardship. It tends to rally when countries are at war, economies are uncertain and inflation is rampant.
But only a certain degree. After all, why is it surging precisely now? Inflation was worse a year ago. The Ukraine war has arrived at something of a stalemate. In the month after Hamas’s attack on Israel on October 7th, the price of gold rose by just 7%—half the size of its more recent rally. Moreover, investors had only recently appeared to have gone off the stuff. Those who thought gold would act as a hedge against inflation were proven sorely wrong in 2022 when prices slipped even as inflation spiralled out of control. Cryptocurrencies like bitcoin—often viewed as a substitute for gold—have gained popularity. Longtime gold analysts are puzzled by its ascent.
An investor who cannot understand a rally on the basis of fundamentals must often consider a simpler rationale: there have been more eager buyers than sellers. So, who is buying gold in bulk?
Whoever it is, they are not using exchange-traded funds, or etfs, the tool most often used by regular folk through their brokerage accounts, as well as by some institutional investors. There have, in fact, been net outflows from gold etfs for more than a year. After tracking each other closely throughout 2020 and 2021, gold prices and etf inflows decoupled at the end of 2022. Although prices are up by around 50% since late 2022, gold held by etfs has dropped by a fifth.
That leaves three buyers. The first, and biggest, are central banks. In general, central bankers have been increasing the share of reserves that are stored in gold—part of an effort to diversify away from dollars, a move that gathered pace after America froze Russia’s foreign-exchange reserves in response to its invasion of Ukraine. Nowhere is this shift clearer than in China, which has raised the share of its reserves held in gold from 3.3% at the end of 2021 to 4.3%. Trading has picked up in the so-called over-the-counter market, in which central banks buy much of their gold. China’s central bank added 160,000 ounces of gold, worth $384m, in March.
The second is big institutions, such as pension or mutual funds, which may have been making speculative bets or hedges on gold—in case inflation does come back or as protection against future calamities. Activity in options and futures markets, where they tend to do most of their trading, is elevated.
The third potential buyer is the most intriguing: perhaps private individuals or companies are buying physical gold. In August it became possible to buy hunks of the metal at Costco, an American superstore beloved by the cost-conscious middle classes for selling jumbo-size packs of toilet paper, fluffy athletic socks and rotisserie chickens, all at super-low prices. The retailer started selling single-ounce bars of gold, mostly online, for around $2,000—just a hair higher than the spot value of bullion at the time. It sold out almost immediately, and continues to do so whenever it restocks. Analysts at Wells Fargo, a bank, estimate that shoppers are buying $100m-200m worth of gold each month from the superstore, alongside their sheet cakes and detergent.
That would be 40,000 to 80,000 ounces of gold each month; or, in other words, up to half as much as the Chinese central bank. Such behaviour is perhaps a harbinger of a trend. Inflation in America is creeping up again. It has overshot expectations for three consecutive months, and would reach 4% in 2024 if current trends were to continue. Medium-term expectations, which had dropped, have begun climbing. As shoppers peruse Costco’s wares, worrying about the cost of living, it is it any wonder they are tempted by a bit of bullion?■
Read more from Buttonwood, our columnist on financial markets:
How to build a global currency (Apr 4th)
How the “Magnificent Seven” misleads (Mar 27th)
How to trade an election (Mar 21st)
Also: How the Buttonwood column got its name
