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LAWRIE WILLIAMS: Gold tentatively holds above $1,800

Gold has been pretty much range-bound of late – between around $1,750 and $1,820.  If the past few days are anything to go by, though, it may be finding a base at around the $1,800 level from which it may be able to build and move higher through the remainder of the northern summer.  July and August have been strong months for precious metals over the past couple of years, but as a warning this apparent strength has not necessarily continued over the final four months of the year.  As we have warned previously, the deliberations at the late-August Jackson Hole Fed meeting, closely followed by the U.S. Labor Day holiday, could signify a turning point in the metal price, but whether this would be upwards or downwards remains uncertain at this time.

What may be encouraging in the short term for the gold investor is that there have been occasions over the past week or two that the metal price has spiked downwards below the $1,800 mark. But each time it has made a very rapid recovery.  This is a definite sign that the gold price may be making a base from which it should move higher.  However, some of the strong price momentum which we saw in June seems to have deserted the market for the time being, and failing some geopolitical or geo-economic crisis, any progress from current levels is more likely to be slow and steady, rather than sharp.  We thus suspect that the likelihood of the gold price breaching the $2,000 level this year has diminished accordingly, although there is still five and a half months to go until the year end and things could change dramatically by the end of December.  Never say never!

There are some interesting positives for gold out there.  Central banks look like they may be in gold buying mode again, potentially possibly led by Russia now the oil price has recovered sufficiently to allay any balance of payments difficulties the nation had been experiencing.  The fall in the oil price down to around the $40/barrel level had left it with the possibility of running up big current account deficits as oil and gas had been its principal export earners.  It had been able to counteract this shortfall by persuading its gold miners (it is the world’s second largest gold producer after China according to the latest data from Metals Focus) to sell their product on the international market rather than directly, or indirectly, to the Russian central bank which had been the case previously.  Oil is now trading well above $70/barrel, while Russia has announced it is to allow its sovereign wealth fund to buy gold, which had not been the case before, and the sovereign wealth fund’s holdings form part of the nation’s forex reserves.

Meanwhile some other central banks are joining the gold purchasing spree, Hungary and Thailand have both made significant gold purchases in recent months and Poland and Ghana have said they will be doing so.  India, Kazakhstan, Serbia, the UAE and Turkey have been regular gold purchasers too and these are the countries we know about.  Central banks tend to be obsessively secretive in their dealings, so there could well be others too.  China, in particular, has been notably opaque about the level of its gold purchases and total holdings in the past. 

Some analysts suggest that this year central banks could well add 500-600 tonnes of gold to their reserves.  This would be a decent increase on last year’s 326 tonnes as estimated by the World Gold Council.

There are also excellent signs that gold demand in China, the world’s largest gold consumer, as measured by gold withdrawals from the Shanghai Gold Exchange, are picking up nicely.  These are up by over 330 tonnes in the first half of the current year compared with 2020 (See: Big demand boost for China gold in June), while global new mined gold output is pretty well flat at the moment as ‘peak gold’ is close, if not with us already.

14 Jul 2021 | Categories: Gold, China, Russia, FOMC

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