Year-End Insights: Examining Strong Fundamentals for Gold

Sean Brazney: Hello, my name is Sean Brazney, Sales Director for Monex Deposit Company. I have the great pleasure of having the brilliant mind with us today, Jeffrey Christian from CPM Group, one of the many analysts over there at CPM Group. Thank you for joining us today, Jeffrey.

Jeffrey Christian: Sean, it’s always a pleasure to talk with you.

Sean Brazney: We are here to really kind of get into some of the details and talk about our bi-monthly report on our, 2023 Precious Metals in the Eye of the Storm. As a reminder, again, bi-monthly, we’re not here just to talk about an old stale report. You guys are doing a lot of effort, putting a lot of time and effort into creating this report for us bi-monthly. There’s a lot of new information that comes out on a regular basis. So, I want to remind our viewers of this, but you have our newest report, as the author of the newest one in October, and it’s titled, Technically Weak and Fundamentally Strong. With what we’ve seen in the markets here over the last few months and then recently with a little bit of a break to the downside, I’m really looking forward to some of the details that you have in regards to the fundamentally strong after this break to the downside. I’m wondering if you can share some of those details with us.

Jeffrey Christian: Go through the market sort of in order as opposed to, normally I will jump in and talk about investment demand at Central Banks, which are the most important factors, but if you look at the way we build our model of the market, we start with supply, go through fabrication demand, and end with investment demand in central banks. So let me do that.

The first strength, fundamentally, is that you have seen mine production peak in 2017, and it declined for a couple years after that, and over the last two years and into this year. Mine production is expanding, but it’s expanding less than 1%. So, you have a decline in the rate of supply coming into the market, and even though it’s growing a little bit, it’s growing very weakly, and it’s not growing as strongly as fabrication and investment demands are.

The second factor is fabrication demand, and most of the gold that comes into the market, maybe 120 million ounces comes into the market, and maybe 80 or 90 million ounces goes into jewelry and electronics and other applications. We’ve gone through a period of time where jewelry and electronics were rather weak, last year and then with electronics into this year, but what we’re seeing now is a pickup in investment demand or a consumer demand for jewelry, and jewelry demand is growing relatively healthfully in China, as well as in the United States, other parts of the Americas, Latin America, South Africa. You’re seeing consumers buy more gold jewelry, and that’s in stark contrast to like last year. Last year, for example, in China, you saw a very strong demand for gold jewelry in the first quarter, not only in China, but in North America and Europe as well, and then it just turned itself off. In China, you saw about a 74% decline in jewelry demand from the first quarter to the fourth quarter of last year. It started to pick up in December. It accelerated into this year and it is recovering this year. So, you’re seeing stronger offtake of gold that goes into fabricated products—It doesn’t stay in gold form.

Now, the two big factors that are important are what we call stock demand, Central Bank buying and investors, and there’s radical differences between the two. Central Banks buy gold for our monetary reserve purposes. An investor, like an institutional investor, will say, “We’re going to invest with a one-year or a three to five-year time horizon.” Central banks don’t have a time horizon for their investment. They say, “We’re buying gold and and we’re adding it to our reserves, we don’t plan to sell it unless we really need to,” and you’ve seen central banks buying gold really for the last 15 years now. It got a little bit low for a while, but it’s picked up. Earlier this year, you saw several central banks, specifically Turkey, Uzbekistan, and Kazakhstan selling some of their gold, because they ran into shortages of their foreign exchange reserves, and they needed dollars and euros to pay for imports. Those are three countries that not only– well, the first thing is those three countries are working as entrepots for stuff that’s not supposed to be sold into Russia. So, people in Turkey, Uzbekistan, and Kazakhstan are buying this stuff and then selling it into Russia, and you’ve seen this increased demand for imports for re-export into Russia. That’s been very lucrative for people in those three countries. So, they’ve been buying stuff for imports for themselves, as well, and as a result, in the first few months of this year, the countries ran short of foreign exchange to pay for all their imports, and they sold gold to raise foreign exchange. That’s now behind the market. So, if we saw five million ounces of gold sold by those three countries in the first half of this year, it’s not there now. Like last month, the only Central Bank that sold gold was Mexico, the Central Bank of Mexico, and it sold like 2,000 ounces that it was using for coins. So, you’ve got a decline in the gross sales by Central Banks, and you’ve had an acceleration of the gross purchases. So, as a result, you’ve seen the People’s Bank of China buy gold this year, every month just about this year. They’ve added probably about 6 million ounces, 7 million ounces, so far this year, but you’ve also seen Singapore, Poland, and various other countries buying gold and adding it to their monetary reserves. As a result, you’ve got about 8 million ounces of net purchases by Central Banks as a group through August, and you might be 11 or 12 million ounces for the full year. That would be up 10-20% from what we saw last year. So, Central Banks are buying more gold, and that’s sticky gold, that goes into a vault someplace and unless there’s an emergency, it doesn’t come out. Investors have pulled back a little bit in the third quarter. They were very strong buyers in several countries and regions in the first half of this year. China, again, you had seen a deep decline in investment demand for gold in China last year. Then they came back and they were rebuilding their positions in the first half of this year, cooled off a little bit in the third quarter, but we’re seeing signs that its starting to pick up. The same kind of pattern is being seen in North America and Europe. India, which is a large market for gold, both for jewelry and for investment demand. India has been a little bit more restrained this year, but in Europe, in North America, and in China, what you’re seeing is a pickup in investment demand. There was a cyclical weakness in the third quarter, but it seems to be coming to an end, and given a number of economic and political and financial market concerns, you know, stalemate of government in the United States. Now, we have a war between Israel and Hamas. Given the unsettled nature of the economic and political environment, we’re starting to see investors buy again.

Sean Brazney: You’re bringing up some great topics. You’re getting into consumer spending. I like you touching base on debt to GDP ratio, and you talk about recession, and the potential for or soft-landing inflation. It’s just a real meaty report, and then you get to kind of the end part of our report where you get into market summary, and you share a little bit of information on some technical information, and range-bound where we’ve been and where we might go. So, just a very valuable piece of information. I’ll throw out there to keep an eye on the 10-year note, keep an eye on the dollar, where they’ve been trading at recently on the longer-term charts. Maybe, we see just a change in the news at some point moving forward there that could cause that to go in another direction. Maybe we’ll get into that again on another video with you. But again, just some great information. Again, coming out of CPM group for our most recent report.

I’ll remind our viewers to please call in, talk to an account representative, and get your free report today. Thank you for your time with us today, Jeffrey.