Investor Demand for Gold
When it comes to investor demand, the gold market is in a pretty deep funk. But we can’t be that surprised by this turn of events. Why would someone hold gold when opportunity costs are rising, and they can get a 5% yield in short-term money markets? Growing expectations that the U.S. economy will see a soft landing means that investors could see practically risk-free returns with short-term T-bills.
Central Banks Buying Gold
After record purchases in the first half of 2023, data shows that central banks continue to buy gold, with China dominating the marketplace. Data shows that the People Bank of China bought 23 tonnes of gold last month and has bought more than 100 tonnes so far this year. This past week the World Gold Council also noted that Turkey, Poland and the Czech Republic also increased their gold reserves in July.
Central Banks & the U.S. Dollar
While demand may be down from record levels seen last year, central banks continue to buy gold because their faith in the U.S. dollar continues to weaken. Willem Middelkoop, creator of the Commodity Discovery Fund, expects central bank gold demand to continue to support gold prices and drive them higher through year-end. “When you buy gold, it’s a direct vote against the U.S. dollar,” said Middelkoop. “China is sending a message to the White House that they don’t support the global financial system backed by the U.S. dollar.”
Bond Market and Gold
While the U.S. economy isn’t expected to collapse anytime soon, analysts and economists are warning investors that cracks are starting to appear. The U.S. Treasury Department recently auctioned off 30-year bonds, which sold for a yield of 4.189%, its highest level since 2011. However, even that wasn’t enough to attract investors as the amount allotted to primary dealers rose to its highest level since February. Some investors are now starting to ask the question: are we close to a tipping point? If the U.S. government can’t attract investors to buy its debt, the bond market could become unruly, which is when gold becomes a very attractive safe-haven asset if investors lose faith in U.S. bonds.
Conclusion
While investor demand for gold may currently be weak due to rising opportunity costs and attractive yields in short-term money markets, central banks, led by China, continue to buy gold as they lose faith in the U.S. dollar. This ongoing demand from central banks is expected to support gold prices and drive them higher through the end of the year. Additionally, cracks are starting to appear in the bond market, with the recent auction of 30-year bonds showing weakness. If the U.S. government faces difficulties in attracting investors to buy its debt, the bond market could become unruly, leading to a scenario where gold becomes an attractive safe-haven asset. While a U.S. bond crisis is not expected to happen overnight, sentiment can shift quickly, making gold an important asset in uncertain times.
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