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LAWRIE WILLIAMS: Gold and 10 year TIPS inverse diverge.  Buying signal?

For some years now, specialist Vancouver Island-based economic consultancy, Murenbeeld & Co, which publishes its weekly Gold Monitor newsletter, has been pointing to a remarkably close relationship between movements in the gold price and in the inverse of the 10-year USA Treasury Inflation Protected Securities (TIPS) yield.   For the past couple of weeks, coinciding with the latest, perhaps engineered, weakness in the gold price, following the latest FOMC meeting, and its perceived hawkish deliberations, this correlation has widened very significantly.  This suggests either irrational gold price weakness, or an undue change in the TIPS yield.  We strongly assume that the former is the most likely consequence and the gold price may catch up accordingly.  Where gold goes the other precious metals, particularly silver, tend to follow.

In the event, the FOMC meeting, and its ensuing statements, suggested little change in the way the U.S. Federal Reserve was planning to react – it did not foresee any change in its ultra-low interest rate and bond buying programme until well into 2022, if then.  Indeed some analysts feel the Fed may need to continue its low interest rate and easing programme until 2023, and perhaps beyond, to counter the economic challenges brought about by the COVID-19 pandemic and the recovery therefrom.

The above could well account for the apparently stronger gold price immediately ahead of the American Independence Day holiday.  It still has a bit of a way to go before the apparent imbalance with the TIPS yield might be redressed.  This, along with some other positive factors, could well suggest a gold undervaluation with the yellow metal due for further price recovery – in other words a strong buying signal leading into July and August – months that have sometimes seen huge precious metals price rises.

The latest piece of strongly positive news for gold – and as we have said before, where gold goes the other precious metals, particularly silver, tend to follow – was that the Thailand central bank added some 90 tonnes of gold to its reserves in April and May.  What is uncertain is whether that nation’s gold purchasing is yet complete and whether further purchases may still lie ahead. 

The Thai purchase follows immediately behind the news that Hungary bought around 63 tonnes of gold in March, effectively tripling its gold holdings to 94.5 tonnes, making it, at the time, the world’s 36th largest gold holder according to figures reported to the IMF.

A recent Bloomberg article noted that central banks had helped underpin the gold price for most of the last decade, but had switched to becoming net sellers in the third quarter of 2020 as some producing nations cashed in on surging prices driven by investment demand and perhaps as a necessity to bolster their COVID-19 hit economies.  But this now seems to have reversed.  Given how secretive some central banks tend to be regarding their central bank gold holdings, one wonders whether some others have been expanding their holdings too.

As nations look to safeguard their finances in the wake of the pandemic, Bloomberg goes on to note that Polish central bank Governor Adam Glapinski said last month that the bank may buy at least 100 tonnes in the coming years to demonstrate the country’s economic strength. Serbia has also been making small but steady purchases since the start of 2019, while gold focused India has  been a relatively steady buyer too.

On a monthly basis, Hungary’s purchase would be the biggest since June 2019, when Poland bought 94.9 tonnes, according to World Gold Council (WGC) data.  And, of course, the Thailand purchase is even larger, although taking place over two months rather than one.  The WGC says it anticipates that central banks will be net gold purchasers this year, although how large these purchases will be in total remains uncertain.

The true level of central bank gold purchases may yet depend on Russia and China – officially the world’s fifth and sixth largest gold holding nations.  Both have appeared to have dropped out of the gold purchasing segment, but there has always been doubt about China‘s gold purchasing activity and the true size of its total gold holding, which some suggest may be several times the amount it reports to the IMF.  China has justified some lack of transparency in its gold holdings in the past by saying that some of its gold is held in accounts that do not have to be reported to the IMF - for example the Chinese military is believed to have substantial gold holdings as do the country’s state-owned banks.

Russia has also ceased monthly gold purchases, but may have paved the way for increases with a policy which now allows its sovereign wealth fund, which is controlled by the bank of Russia, to hold gold, which was previously outside its purlieu.  The cessation of gold purchases was due to a need to rebuild export earnings which had been devastated by the huge falls in oil and gas prices – previously bey far its biggest export earners  The country vies with Australia to be the world’s second or third largest gold producer after China, so by ceasing to buy in its domestically-produced gold, the country’s gold miners were thus persuaded to sell their product on the global market, so the country’s balance of payments problem was simply rectified.

05 Jul 2021 | Categories: Gold, Silver, China, Russia, US, India, FOMC

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