The West is losing its grip on the price of gold

A recent shift in the global gold market indicates that the East, particularly Turkey and China, is gaining influence on the Gold price, which was traditionally a domain controlled by Western institutions. From the end of 2022 to June 2023, gold prices rose by 17%, despite stable real interest rates and net sales by Western institutions.

This challenges a long-standing trend in which Western institutions, especially in London, dictated gold prices based on real interest rates. The change may signal the growing economic importance of the East and the divergent investment strategies compared to the West.

Western influence is declining

For nearly a century, the gold market saw a consistent trend of above-ground gold flows between the West and the East, relying on bull and bear markets. Western institutions mainly used the 10-year TIPS rate, which reflects the expected 10-year real yield of U.S. Treasuries, as a guide to buy or sell gold.

Historically, Western institutional money has been the dominant force in determining gold prices in wholesale markets such as London. Gold trading in London included direct transactions in large bars, trading through Exchange-Traded Funds (ETFs), and arbitrage trading that took advantage of price differences between COMEX futures and London spot prices.

However, a significant shift took place after the conflict in Ukraine broke out at the end of February 2022. Data shows that gold prices are less and less correlated with real interest rates, suggesting that London's influence on gold prices is waning.

The correlation between real interest rates and gold (Source: Gainesville Coins)

The East Takes the Lead

Turkey and China have emerged as key players driving up the price of gold. Turkey's net gold imports reached an all-time high in January 2023, when the Turkish lira devalued, prompting citizens to invest in gold. China also showed stronger net imports in late 2022 and early 2023 than expected.

Moreover, there are indications that central banks in the East may be quietly buying gold. This is indicated by a discrepancy between the World Gold Council's quarterly estimates and what central banks report to the IMF.

Conclusion

The East's newly acquired influence on the gold market may herald a greater shift in global economic power dynamics. Factors urging central banks to add gold reserves are expected to continue, potentially leading to a long-term change in how gold prices are determined. As the East gains more control over the price of gold, the metal could play a more central role in the international monetary system.

The change raises a question about whether the West will regain control of gold prices or whether this is a permanent shift. The answer will have implications not only for the gold market, but also for global economic stability and policy.

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe. 

Author: Jan Nieuwenhuijs

Source: Gainesful Coins