In La Tribune 07/10/2024
Gold prices were at $282.05 on January 4, 2000; 4 years ago, the last time we looked at this market, they were at $2,000 and on October 4 this year at $2,657.50. At the same time, the CAC 40 went from 6,275.72 in 2000, during the internet bubble, to 7,541.36 on October 4.
Comparison is not reason, but in 24 years gold has made more than 840% while the CAC 40, with its much more unstable progression, rose by 20% over the same period.
The internet crisis of 2001, the subprime crisis of 2007-2008, quantitative easing policies accompanied by disinterest rates (negative rates where the lender pays instead of being remunerated) as well as the specters of national debts, this all form a set that has favored negative real interest rates (RIR). RIR is the result of a subtraction between interest rates and inflation. Negative, it favors the rise of gold, and vice versa.
Between 2000 and 2019, RIR gradually pushed gold prices from $282.05 per ounce to $1,300. Then from 2019 this rate, weighed down by the inflation caused by the covid 19 crisis, accelerated the rise to $1,895.45 on February 21, 2022. Over the period, the average annual increase was $73.
RIR’s influence during this period supplanted that of the fundamentals of the physical gold market (production, jewelry consumption, investment, stocks).
This model could have continued at a moderate pace, since a few days before the Russian war in Ukraine we wrote that we saw a return of post-covid inflation to 2.5%; a level that we now know well in the euro zone by now.
Geopolitics of « out of control »
But this influence was dethroned by that of the geopolitics of « out of control » and « anything goes ». Since February 22, 2022, the rise in gold has accelerated with an average annual increase of $295. Now close to $2,700, what direction will it take tomorrow after $3,000?
A first answer is that it is very likely that we will not see gold close to $250 again as in 1999. Otherwise, we would need a very strong easing resulting from the advent of an as yet unknown event.
A second indication is the influence of the fundamentals of the gold market: production, consumption, stocks.
To maintain a moderate price increase, its mining supply, whose average production costs have quadrupled since 2000, will have to continue to be socially and environmentally accepted at all costs at the current rate of 3,600 tons per year. This is by no means guaranteed, although mining production sometimes comes from regions that pay little attention to ESG criteria. A third comes from Africa, 18% from Asia, 16% from Central Asia and Russia, 15% from Central and South America, 13% from North America, 9% from Oceania and 1% from Europe. This risk is upward for prices.
Consumption, for its part, is downward. The rise in prices has seriously handicapped the jewelry industry since 2015. However, it represents 44% of demand and half of it is manufactured from recycled metal. Furthermore, only 6% of the available gold is used in industry, including electronics.
Finally, gold stocks are overflowing. Of the 213,000 tons of gold extracted since the dawn of time, 45% are already in the form of jewelry. Recyclable at will, this volume represents 44 years of jewelry consumption. A few industrial uses represent around 15% of the world’s stock; they are also recyclable.
Finally, 39% of the world’s gold stocks are the assets of individuals and central banks.
In other words, if we made better use of the world’s gold stock, we would probably no longer need to add 3,600 tonnes of mined gold each year and prices would stabilize. However, this theoretical vision is largely challenged by the influence of geopolitical events.
Wars and tensions: « In gold we trust »
The Russian war in Ukraine, the October 7 massacre and its repercussions, Sudan, the Taiwan-Beijing relationship have been and will continue to be, in various ways, inflationary for gold prices. The economic wars that derive from them matter just as much, if not more, because they pose very direct questions to individuals and central banks.
First question. Why has the man in the street, who may prefer coins or ingots to the dollar, the euro or the yen often is been considered an illiterate naive by economic science. Of course, it brings him neither interest nor dividends, but the tranquility of the safe haven that flatters the reptilian part of his brain by repeating these verses from Lucretius: « It is pleasant, when on the vast sea the winds raise the waves, to witness from the land the harsh trials of others; not that anyone’s suffering is such a great pleasure to us, but seeing what evils we ourselves escape is a sweet thing. » Unsurprisingly in 2024, Asia is very sensitive to Lucretius, while the Middle East, Europe and the United States took their profits.
Second question. Will a country under sanction hoard the currency of the one sanctioning it for long? Alan Greenspan provided an answer in 1999: « gold still represents the ultimate form of global payment« . Indeed, and another important element: gold is not a debt. Since its value is not attached to any issuer, gold is no one’s debt (reread slowly and think about it for a long time). If this were not an oxymoron, it would be rated « AAA+++ ». As a result, exporting countries will be able to request to be settled in gold, if they need a payment that does not suffer any economic, legal or geopolitical sanctions?
The Russian central bank also answers the question with an objective: to distance its reserves from Western sanctions. It had 343 tons in reserves in the spring of 2000. Without any real change until the beginning of 2007, its stock, which was 400 tons, has continued to grow since then. It bought 1,936 tons from international markets and from miners in its domestic market to bring it to 2,336 tons in September 2024. Still lower than that of France, it only represents 31% of its reserves.
For its part, how does Beijing, which combines the handicap of Western sanctions and an economic rivalry with the United States, develop its gold reserves?
If China has the idea of reestablishing a sort of gold standard for the renminbi to compete with the dollar, it is logical that it pays attention to its metal reserves. Its stock was 395 tons at the beginning of the century. Since 2001, it has been buying from the markets and miners to bring it to 2,264 tons by the end of 2023. But it only represented a little over 5% of its central bank’s reserves, while the United States is at 73.7%, Germany at 73.1%, Italy at 69.9% and France at 71.5%, to name just the first four.
The Chinese central bank’s gold stock will probably be higher than that of France at the end of 2024 and if it were to approach or even exceed that of its US competitor, it would have to be multiplied by 3.5 in volume. That is to say, filling a hole equivalent to 19 months of mining production.
This is little and a lot at the same time, because this mining production going in the direction of Beijing would deprive other buyers. The most recent are: Saudi Arabia, Azerbaijan, Korea, Belarus, Brazil, Egypt, Kazakhstan, Qatar, Uzbekistan, Poland, Thailand, Turkey, Singapore. India, after having bought 491 tons since 2002, has almost 3 times less gold than China. In total, central bank purchases have tripled since the Russian invasion of Ukraine.
In any case, such a one-way operation towards Beijing for 19 months would see the price of gold become prohibitive. Some would envisage a value of an ounce between 10,000 and 25,000 dollars, 4 and 8 times more than today. The spectrum is wide, but it is certainly not enough, as this hypothesis is so far from the reality of such a world, and a solution to reduce this deleterious effect would consist in adapting the rules and finding bimetallic reserves. Although at one time the Russian central bank stockpiled palladium, it would be more serious to find a role for silver metal, whose market has neither the narrowness nor the instability nor the viscosity of the PGMs.
Gold is geopolitical independence
Nowadays, the essential quality of gold is therefore its geopolitical independence. And since its market remains deep, stable and liquid, it is over time that buyers build this autonomy, by buying from their domestic mining companies, on OTC market but also from other selling central banks. However, the latter are often sellers of gold for the wrong reasons.
On May 7, 1999, London shouted from the rooftops that the Bank of England was going to sell half of its gold stock. In Keynes’ homeland, the metal was a barbaric relic that it was relevant to part with because it yielded neither interest nor dividends.
At that time, during in-depth discussions with New York banks, we agreed that London was on the wrong track. Its profitability objective was displayed as that of a commercial bank. Gordon Brown had lost sight of the role, the purpose of his bank and the long-term perspective that governs its action: crisis management, particularly monetary. There was probably also great confusion about the long-term perspective that guides the gold market.
In fact, this long history proved London wrong and darkened its reputation. After the « urbi et orbi announcement » of the sale of 395 tons in May 1999, prices naturally collapsed and the London auctions collected the lowest prices, with an average of $276. London collected $3.5 billion, while this position is worth ten times more today. This operation remained a financial disaster whose political metaphor is the effect of Brexit on English society and the economy.
Other central banks have sold
France had 4,700 tons of gold in 1967. The events of May 68 evaporated 1,000 tons, to defend the franc. Then, to devalue the latter, the Pompidou presidency sold nearly 700 tons, France entered the century with 3,024 tons. Between 2004 and 2009, within the framework of the second Washington agreement, under the presidencies Chirac then Sarkozy, in the middle of this dazed era of peace dividends or the era of great financial moderation, Paris gave up the equivalent of 589 tons for 9.2 billion euros.
The objective? To generate an annual income greater than 200 million euros in order to reduce public deficits; a result that we would like to see today… The product of this trade was, in fact, placed on the Australian dollar and the pound sterling. The management of this last speculative position generated a foreign exchange loss estimated at 1.6 billion euros, according to the Cour des Comptes in 2012. Added to the contrasting results of this trade, the patrimonial epilogue is, as for London, a significant loss. Not only, given the appreciation of gold prices that was anticipated as early as 2006, should sales have been stopped as did Belgium, Portugal, Austria and Spain.
In addition, the 3,024 tons of 2000 whose value was estimated at 27 billion dollars would have, without the sale of 589 tons, a current value of 262 billion dollars. The 51 billion dollars that vanished are equivalent to the payment of one year of current French debt. Since 2009, the French gold stock has been stable at its current level of 2,435.4 tons and valued at the current price at 211 billion dollars.
But, let’s return to the initial question: what direction after gold hits 3,000 dollars in 2025 ? Two answers come naturally.
- After having reduced the proportion of their gold stocks contained in their reserves from 14% in 2000 to 9% in 2015, the world’s central banks have raised this ratio to 17% in 2024. This movement will continue if the financial neutrality of gold « personal debt » remains important; and if its fiduciary independence from the dollar « sanctions currency » as well as its geopolitical sanctuary « safe haven » anti-crisis remain relevant.
- Moreover, the debts, insubstantial of understanding and comprehension that threaten certain countries, are considered marginal under less indebted skies and oriented towards a continuation of growth, which is accompanied by an interest rate – inflation (RIR) configuration favorable to gold.
Consequently, after a progression of 15% to reach 3,000 dollars in 2025, without other cataclysms (a statistically most often inaccurate hope), the long term needed for the transmission of an heritage conveyed by gold can in the medium term and all things being equal be based on a price progression included in a delta of 4 to 7%.
Naivety has the face of truth!
The gold dumping following the four Washington agreements from 1999 to 2018 raises questions. The central banks of France, Germany, Austria, Belgium, the Netherlands, Portugal, Spain, Sweden, Switzerland, the ECB and the United Kingdom will have sold about 4,110 tons of gold. At the same time, the United States sold only about 5 tons… while Russia, China and India bought about 4,295 tons.
The world is always dangerous somewhere, and the future is uncertain everywhere. « Naivety has the face of truth » wrote Hugo, a truth that says that between the post-Cold War and the warmer pre-wars, the NATO European democracies and Switzerland gave up gold bought in particular by Russia and China. The great popular philosopher of the 20th century, Coluche, was less naive when he declared: « It’s not because many of them are wrong that they are right. »
This era demonstrates that the Keynesian barbaric relic of a civilized world and economy has become in the 21st century the civilized relic of a world and economy that have become barbaric. It is therefore interesting to study the validity of global gold production, that of the African Great Lakes as well as those of the Saharan borders so dear to mercenaries, the behavior of gold companies that mine outside their national borders, the Gulf gold markets, ETFs, the movements of Venezuelan, Philippine or Lebanese gold, and the psychology of the Politburo of some central banks.