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The gold price has risen sharply in recent weeks and is already well above $2,000 per troy ounce measured in dollars. This brings back the old record of $2,070 per troy ounce from just over a year ago. Even now that the banking crisis seems to have faded into the background for a while, precious metals are doing well. What factors drive the Gold price and Silver price up?
As Wouter Wilmer in This analysis As I wrote, poor macroeconomic data was the most direct reason for the rise in precious metals prices this week. The U.S. job market is deteriorating and business confidence is falling. Uncertainty about the future and high interest rates are slowing economic activity, both in the United States and around the world. This has repercussions on employment and therefore on the economy as a whole.
U.S. labor market deteriorating
Things are not yet quiet with regard to the banks either. In the United States, regional banks are under pressure due to a flight of savings into money market funds and into alternatives such as precious metals and cryptocurrencies. Regional banks also have a Relatively high exposure commercial real estate, on which substantial depreciation will have to take place.
The fact that the market still has little confidence in the banking sector, despite central bank intervention, is evident from the chart below from Bianco Research. This chart shows that the stock market as a whole is back higher than it was a month ago, but bank stocks have barely recovered from their lows. On average, banks' share prices are now about a quarter lower than they were at the beginning of March.
Banking stocks still not recovered from banking crisis (Source: Bianco Research)
Smaller banks such as First Republic Bank and Pacwest, which fell much harder, are also showing no sign of recovery. The shares of these smaller banks are down 89% and 77% respectively from the beginning of this year. That, too, is a bad sign, because an unhealthy banking sector provides fewer loans and that means less economic growth.
When banks tighten lending, it is often a harbinger of recession (Source: Charlie Bilello)
Since the beginning of this year, central banks have already bought 125 tonnes of gold, the World Gold Council Earlier this week. Never before has so much gold been bought by central banks in the first two months of the year. Coincidentally or not, it was China and Russia that added the most precious metal to their reserves in February. Since the beginning of this year, however, Singapore and Turkey have bought the most gold.
Singapore, Turkey and China were the main buyers (Source: World Gold Council)
China added 25 tonnes of gold to its stockpile in February, while Russia managed to expand from 31 tonnes to gold reserves to 2,330 tonnes. For China, it was the fourth month in a row of gold purchases, while Russia has not reported any purchases to the IMF in the past year. It is therefore not known exactly when the purchase of 31 tonnes took place.
Central banks already bought a lot of gold in the first two months (Source: World Gold Council)
Bad news for the U.S. dollar is often good news for gold. And we have seen major developments in that area as well. In March, the finance ministers and central bankers of several Southeast Asian countries together to talk about reducing their reliance on Western currencies such as the US dollar, the euro, the Japanese yen and the British pound.
During this meeting, participating countries discussed the possibilities of handling more trade in their own currencies. A new digital payment system should make it easier for countries in this region to pay with each other's currencies, without the intervention of, for example, dollars and thus also the American banking system.
Indonesian President Joko Widodo was very outspoken, calling on countries to stop using foreign credit cards and payment systems. He explicitly referred to the geopolitical dimension of the payment system, such as the blockade of Russian banks from the international payment system and the blockade of Russian currency reserves. Widodo wants to limit this risk as much as possible by no longer using Western payment systems.
Very recently, Malaysia and China discussed creation of an Asian monetary fund, as an alternative to the International Monetary Fund (IMF). According to the Malaysian Prime Minister, there is no longer any reason to remain dependent on the dollar. He advocated the use of local currency for international transactions. These kinds of noises undermine the hegemony and thus the value of the dollar and are therefore beneficial for gold.
This week, the World Gold Council for the first time in ten months, an influx of investors into gold ETFs. These investment products are traded on the stock exchange and are therefore particularly popular among large mutual funds and institutional investors. Since March last year, interest has been low, as the gold price has been in a downward trend and alternatives such as shares were more profitable. But due to the banking crisis and turmoil in the financial markets, interest in gold ETFs has increased again.
In March, gold ETFs globally added a net 32 tonnes to their stocks. That's not enough to absorb the outflows of gold in the months before, but it could be the start of a new uptrend. Gold ETFs are relatively large players in the market and can therefore allow the gold price to rise further. All the more so because many large mutual funds and pension funds have little or no exposure to precious metals. If the banking crisis flares up again, these parties may add more gold to their portfolios.
Gold ETFs are adding gold back to their stocks (Source: World Gold Council)
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