Gold Is Getting Scary
Yellow metal is on pace for a 15% gain this quarter alone.
If this chart behaves the way similar pattern setups have behaved in the past (not a guarantee), we could be looking at $3,000/oz Gold in the next few years. - ya boi, April 2023
When I wrote those words last April, the Gold was still battling for just $2k per ounce. We are now a stone’s throw from $2,700. Am I happy my Gold position has appreciated by 35% in 17 months? I’m not sure. I expected a much higher Gold price, but certainly not this fast. Which, if I’m being honest, is a bit concerning. We still have 3 more sessions before the quarter ends but right now Gold is on pace for it’s best quarterly return since Q1-16.
And that’s why this is getting scary. Gold is up 35% in 17 months and nearly half of that gain has been just in the last 3 months. To give readers some context for how massive this move has actually been, consider the market capitalization of Gold:
The best estimates currently available suggest that around 212,582 tonnes of gold has been mined throughout history, of which around two-thirds has been mined since 1950. And since gold is virtually indestructible, this means that almost all of this metal is still around in one form or another. - World Gold Council
Converting 212,582 tonnes gives us a hair under 7.5 billion ounces. Even if we just use year to date as a starting point, Gold’s 2023 closing price of $2,233 implied a total market cap of $16.7 trillion ($16.5 trillion if we take away estimated production tonnage through this year). At $2,680, Gold’s market cap is $20.1 trillion. That means that in just 9 months, Gold has added well over $3 trillion in market capitalization year to date. More than two whole Bitcoin market caps. More than the entire $2.3 trillion total crypto market cap. More than one whole NVIDIA NVDA 0.00%↑ market cap.
In just 9 months.
And almost nobody is talking about it.
I still see no mania here. Search interest in “how to buy gold” is lower than it was in March of 2023 when banks were blowing up. But just because the normies aren’t interested yet, it doesn’t mean the metal isn’t moving around. Costco COST 0.00%↑ continues to sell bars to consumers. Even ETF demand has started to come back around in recent months:
ETF flows flipped back to positive in May after 11 straight months in decline and 21 out of 24 negative months between May 2022 and April 2024. ETFs are obviously starting to come back a little bit here but we’re still well off pre-Russia/Ukraine highs. Where is demand coming from?
Physical bar investment demand has been flat for essentially a decade.
Jewelry consumption was the lowest since COVID in Q2-24.
The biggest change in the supply/demand equation continues to be the bid from central banks. Which I suspect has quite a bit to do with this:
To me, it’s the only thing that explains seven straight months of virtually straight up for Gold. BUT, the trend in quarterly buying from central bankers appears headed down. We’ll get a better sense for how Q3 demand shakes out soon. But it’s possible that supply coming back into ETFs is retail trying to front run more central bank purchases that simply aren’t going to be there. That’s a guess! I’m not backing it with any hard numbers or evidence. Take it for what it’s worth.
But here’s my thinking today…
It FEELS like we’re due for a pullback. Not a steep one by any stretch. But even just a retest of $2,350 makes sense to me. Anecdotally, I’ve seen a lot of traders highlighting $2,700 as the target price for a few weeks. We hit $2,684 this morning. Which means we’re basically there. In my view, we may see some supply hit the ask here. Even if we pullback $350/oz, that seems like a lot, but it’s just a normal correction of 10-15%.
Seasonality-wise, we’re exiting a historically good month for Gold price appreciation over the last half century and entering one that is a bit more of a toss up. Over the last 50 years Gold has had a positive October 45% of the time. Mean change is flat.
Interestingly, September has actually been awful for Gold over the last 10 years. This year we’re bucking the more recent trend. Of course, the past is a guide not a crystal ball. All we can do is our best in assessing fundamentals, technicals, and sentiment. I’d say the fundamental setup for Gold is still great. It’s the technical setup that I believe is mixed - we have a clear long term breakout coupled with what I’d view as a hot short term price move. Sentiment? Also mixed. Central banker buys are slowing down. Consumers? I’m not so sure too many are doing much of anything. Which leaves us with the ETF demand angle again. This feels like traders piling in at a short term top.
I took off a little bit of my Sprott Physical Bullion Trust PHYS 0.00%↑ shares this morning. As a percentage of my total position it was roughly 20%. I have every intention of buying this position back in full. I don’t know if that will be later this year or early next year. But my hope is to buy it back about 10% cheaper. If I’m right about a pullback, I’m happy. If I’m wrong, I’m also happy. We can’t take any of this with us…
Thanks for the article, Mike. As always, a well-researched offering from you. I can say with certainty that I am much more of a newb when it comes to the arena of investing in gold/metals. I really just began my *academic journey* into the precious metals investment arena maybe a year-and-a-half ago, and my current understanding/knowledge base even now leaves much to be desired, I assure you. With all that said, I do have a personal narrative for where gold is currently trading and how it’s gotten here that at least makes a lot of rational sense to me when you look at the market fundamentals and trying to get one’s head around the larger macro flows.
The long story short is that I agree with nearly all that you’ve written in this piece in terms of fundamental drivers of macro flows into gold over the past 1-3 years as well as the competing fundamental forces that are acting to support vs resist price movement in the commodity.
I guess the one main thing that I have in my personal narrative that differs from what you’ve presented, in particular, in the emphasis with which I see this “fundamental macro driver” which has been acting to support/drive northward the gold price in recent years is the buying that was done by central banks and WHY it was done. To end my comment here bc it’s getting long…I feel that the act of the U.S. confiscating Russian reserve assets in response to their invasion of Ukraine was one of those geopolitical moves that will forever have lasting effects on the global geopolitical state of affairs well beyond our lifetimes. I think the repercussions of that move (I won’t get into the judgement of the appropriateness of them or political opinions, etc here) have been, and will continue to be, quite massive and quite under- appreciated (particularly by the political leaders in the West) for quite some time to come, I’m afraid. It sent a signal to basically every country in the world who isn’t one of our closest allies…and it was a loud message imo…
And as you noted, only recently have westerners caught onto the trade - so we’ll be buying the commies’ bags for some time to come, I suspect…
My whole point here: I think central banks will continue buying gold over US treasuries more and more and more so, until they start buying some bitcoin too, of course…so I think big picture, we’re still actuallly kinda early in this gold bull run, imo. I personally have a much greater % of my net worth allocated to Bitcoin and Bitcoin-adjacent assets (equity in miners, $MSTR equity and a couple options, some shit coins, etc…
*academic journey = listening to many hours of podcasts in which gold “experts” were being interviewed to inform the greater investment community on the merits of investing in gold and other precious metals, basically shilling their bags, and oh yeah, also trying (painfully at times) to explain why Bitcoin is too scammy to be taken seriously as a store-of-value alternative to gold…I ignored their advice on the latter and tried my best to learn from those folks on