The Barbarous Relic Shines Again

Posted On April 26, 2020

The pandemic and subsequent lockdown have yet again provided the catalyst for extraordinary measures in the commodities markets – this time with gold. The nearly-indestructible metal once mockingly referred to as a barbarous relic by Keynes is seeing quite a comeback with demand for delivery – actual physical bars – reaching a high. Mints and refineries across the world are struggling to keep up with demand from buyers to where stocks are low with extended delivery times.

The US mint recently closed one of its facilities as an employee had tested positive for COVID-19, with much of the remaining supply being taken over by its operations in Denver and Philadelphia. Demand from some private bullion dealers has even jumped nearly 120% as more people seek to hedge their trades or provide some financial peace of mind through gold purchases. Bloomberg has even reported that Gold Corp, Australia’s largest refinery along with the Perth Mint, has been producing seven and a half tons of 1kg (32.1507 troy ounces) of gold each week without satisfying demand. Because of the travel lockdown, Richard Hayes, chief executive officer of the Perth Mint, said in an interview. “A substantial portion of those kilobars are ending up as Comex deliveries.”. It is fascinating to note that gold bars are making an 11,000 mile trip from Australia to New York to ease a short term supply squeeze.

---

COMEX is the main US-based exchange that provides delivery of metals. It is interesting to see that the primary exchange appears to have limited or reduced supply. The markets are seeing strong demand for the metal coming in from all areas including retail, which does lead to another pondering question, surely upstream supply is also being conducted to provide demand and ease worries of any possible shortages? It does not seem to be the case. Mine like Pan African haven been included in the lockdown leading to a classic economic lesson in rising prices due to limited supply with high demand.

Bank of America has also recently raised prices on gold as a result of additional liquidity injected in world economies by central banks. Citing the growth in money supply and the need to provide cash to businesses and citizens who are unable to participate in the economy, the rationale goes that gold would shine as it side-steps much of that intentional inflating.

---

Central banks are net buyers of gold

Gold has been used as money for literally thousands of years to the point where in many parts of the world gold is the final settlement of debts. Though it has fallen out of favour in developed nations, Central banking has long used gold as a means to store the nation’s wealth, by backing its currency, to then provide a stable financial base for the economy to grow. Recent years have seen a change in this behaviour with many governors, like the former Federal Reserve chair Ben Bernanke, inferring that gold no longer has a place in the monetary system and that central banks keep such gold as it is ‘tradition’. The idea is somewhat confusing as gold storage, assaying, delivery, refining, meting, minting, transportation, and running gold exchanges all cost money. Surely all the players in this market can not be buying gold for sheer posterity? It is difficult to see how gold, from a central bank’s view, is nothing other than a strategic national asset which safeguards a nation from financial ruin in times of need, war, and desperation. One might argue a nation that has gold, it also one that is free from tyranny.

Relative to other nations, China has been a keen buyer of gold to where it now has around 2000 tons of gold in its reserves. This number excludes jewlery, and any other gold held privately outside the Bank of China.

---

Data and charting by self (feel free to reuse with credit).

---

Can gold go higher?

Strong counter-arguments for a lower gold price is that central banks are indeed helping businesses and ordinary workers with payments that will see them through the lockdown. This is an indication that we are not at the feet of an apocalypse just yet. Another simple indicator is that platinum is around half the price of gold currently, but historically, it has always been mover expensive, or around 20%. One might argue that gold is overvalued by this one metric. Nevertheless, the Bank of America is also correct in its assumption that more QE will lead to a weaker currency, and that in turn would cause problems for the global economy. Given that all currencies are in a sense ‘floating’ and not pegged to a tangible asset will mean that volatility is baked into the cake. Even today, despite being sidelined, gold does still serve its function as a store of value that maintains purchasing power throughout the ages. Another chapter in the story of gold has been written but the end is still not in sight.