According to some analysts the rise of gold is the byproduct of global fragmentation. One superpower that dictates the rules means its currency is the global reserve currency and its treasury the store of value. As the hegemony loses power, multipolarity rises, hence the need for the neutral reserve asset (one everybody can accept), and that is gold. Proof in the pudding: CB reserve managers hold more gold now than US Treasuries as pct of all assets. In the 80s and following, they rushed to sell gold, as the dollar was enforced as the new means of exchange. As trust wanes, the seeking of a new means of exchange (the neutral reserve asset) pushes gold buying. So, there is no single factor that can explain what is happening in such an overpowering way, as trust itself. Trust in a fiat currency is what upholds the currency. Waning trust is what upholds the current shift. The shift will continue, till nations hold that much of gold that makes them comfortable, given their desire to step away from the dollar. For China and Russia, an infinite amount of gold and zero dollars would be the ideal scenario. For all the others, something in between
Except for a very small scale of industrial application, gold is nearly always mined, refined and then stored. Nearly all gold extracted 5,000 years ago is still with us. According to World Gold Council, gold in storage is 60-65 years of annual production. The annual new supply of gold is less than 2% of existing inventories. It takes many years and a great deal of capex to have a meaningful increase in gold extraction. Thus, supply of gold by mining is highly inelastic. The connection between miners' stock performance over a period of a few years and a significant increase of mining supply that could drive down the gold price is very weak.
Fair points. Gold production increases have probably happened after long periods of dollar weakness - so its not the supply that get gold, just the macro
The gold miners are in a slightly different situation currently. Yes capex has gone up but they are minting (pun intended) money at the moment and actually increasing dividends and buying back shares rather than blowing out corporate costs or going on a spending spree of acquisitions. The third quarter earnings are going to be a ball-tearer (technical term) and the current one is going to be even better. Diesel costs are down, steel, inputs etc all down or at least stable. Wage pressures also weak.
There is a moment in the cycle when these things rip and I mean really rip . We are only in the first or second innings of this one IMHO for what it’s worth.
sure - I can see that. But as the old jokes goes, a man had a horse that ran well sometimes, and was lame other times. He asked the villager elder what should he do. the Elder told him to sell it when it was running well
We’ve seen about 150 tonnes come into GLD this year, but as you say, we are still 260 tonnes lower than the 2020 high when gold was $1,900. So, while there has been an increase from retail, it doesn’t suggest a crowded trade yet. I agree. Also interesting, on the COMEX, open interest hasn’t really picked up much this year either: 491,000 contracts today versus c480,000 in January. Today, there is approx 40m ounces of gold in COMEX inventory, 22M is registered and likely fully hedged with 220k futures contracts. Perhaps a percentage of the 18M eligible is also hedged. That leaves limited spec positions in gold futures, and again, far from elevated levels. (645,000 contracts OI was the high in recent years).
Now on to the voodoo part. I have found a pattern that has repeated with regularity in the gold market - a 6 monthly cycle, that I have counted, daily, for 15 years now. The data backs up a bullish technical view that this run still has the potential to last for another couple of months before the next shakedown. Next one should be a significant correction, but as long as the technicals continue to behave, gold keeps making right-translated daily cycles, and keeps respecting the rising MA’s, probability favours higher prices.
Thanks Russel! Looking at the YoY change in Capex rather than absolute values provides a different picture (I.e. capex is increasing but at a more moderate rate compared to the past: if you look at the companies in the GDX it increased by 44% and 29% in 2011 and 2012 respectively, while it increased by 11% in 2024 and it is expected to increase 25% this year and decline over 2026-27). And as you said, keeping the supply of gold unchanged YoY has becoming increasingly difficult and costly. Central banks stop / slowing purchases because of the high prices seem the main risk. However, both the US and Chinese debt/macro situations suggest that eventually they will need to print substantially to resolve their debt problems which makes the case for gold still quite compelling.
TBH - the capex story is not so important to me... its the china story thats the main driver, and that is a political and macro story, so need to be vigilant
According to some analysts the rise of gold is the byproduct of global fragmentation. One superpower that dictates the rules means its currency is the global reserve currency and its treasury the store of value. As the hegemony loses power, multipolarity rises, hence the need for the neutral reserve asset (one everybody can accept), and that is gold. Proof in the pudding: CB reserve managers hold more gold now than US Treasuries as pct of all assets. In the 80s and following, they rushed to sell gold, as the dollar was enforced as the new means of exchange. As trust wanes, the seeking of a new means of exchange (the neutral reserve asset) pushes gold buying. So, there is no single factor that can explain what is happening in such an overpowering way, as trust itself. Trust in a fiat currency is what upholds the currency. Waning trust is what upholds the current shift. The shift will continue, till nations hold that much of gold that makes them comfortable, given their desire to step away from the dollar. For China and Russia, an infinite amount of gold and zero dollars would be the ideal scenario. For all the others, something in between
Agreed... but much tighter financial conditions would be poor for gold too.
Except for a very small scale of industrial application, gold is nearly always mined, refined and then stored. Nearly all gold extracted 5,000 years ago is still with us. According to World Gold Council, gold in storage is 60-65 years of annual production. The annual new supply of gold is less than 2% of existing inventories. It takes many years and a great deal of capex to have a meaningful increase in gold extraction. Thus, supply of gold by mining is highly inelastic. The connection between miners' stock performance over a period of a few years and a significant increase of mining supply that could drive down the gold price is very weak.
Fair points. Gold production increases have probably happened after long periods of dollar weakness - so its not the supply that get gold, just the macro
The gold miners are in a slightly different situation currently. Yes capex has gone up but they are minting (pun intended) money at the moment and actually increasing dividends and buying back shares rather than blowing out corporate costs or going on a spending spree of acquisitions. The third quarter earnings are going to be a ball-tearer (technical term) and the current one is going to be even better. Diesel costs are down, steel, inputs etc all down or at least stable. Wage pressures also weak.
There is a moment in the cycle when these things rip and I mean really rip . We are only in the first or second innings of this one IMHO for what it’s worth.
sure - I can see that. But as the old jokes goes, a man had a horse that ran well sometimes, and was lame other times. He asked the villager elder what should he do. the Elder told him to sell it when it was running well
We’ve seen about 150 tonnes come into GLD this year, but as you say, we are still 260 tonnes lower than the 2020 high when gold was $1,900. So, while there has been an increase from retail, it doesn’t suggest a crowded trade yet. I agree. Also interesting, on the COMEX, open interest hasn’t really picked up much this year either: 491,000 contracts today versus c480,000 in January. Today, there is approx 40m ounces of gold in COMEX inventory, 22M is registered and likely fully hedged with 220k futures contracts. Perhaps a percentage of the 18M eligible is also hedged. That leaves limited spec positions in gold futures, and again, far from elevated levels. (645,000 contracts OI was the high in recent years).
Now on to the voodoo part. I have found a pattern that has repeated with regularity in the gold market - a 6 monthly cycle, that I have counted, daily, for 15 years now. The data backs up a bullish technical view that this run still has the potential to last for another couple of months before the next shakedown. Next one should be a significant correction, but as long as the technicals continue to behave, gold keeps making right-translated daily cycles, and keeps respecting the rising MA’s, probability favours higher prices.
Thanks Russel! Looking at the YoY change in Capex rather than absolute values provides a different picture (I.e. capex is increasing but at a more moderate rate compared to the past: if you look at the companies in the GDX it increased by 44% and 29% in 2011 and 2012 respectively, while it increased by 11% in 2024 and it is expected to increase 25% this year and decline over 2026-27). And as you said, keeping the supply of gold unchanged YoY has becoming increasingly difficult and costly. Central banks stop / slowing purchases because of the high prices seem the main risk. However, both the US and Chinese debt/macro situations suggest that eventually they will need to print substantially to resolve their debt problems which makes the case for gold still quite compelling.
TBH - the capex story is not so important to me... its the china story thats the main driver, and that is a political and macro story, so need to be vigilant