Physical assets as opposed to financial assets have an intrinsic value due to their substance and ownership. Commodities provide investment portfolio diversification as they often move in the opposite direction to the performance of financial assets such as stocks, bonds or mutual funds. In particular gold, which is negatively correlated with financial products: the relative value of gold increases during times of inflation and war.
And in a period like the present one, in which inflation has grown exponentially, it is legitimate to ask why the yellow metal has not followed the same trend. The simplest answer is in the interest rate hikes by central banks, especially the Federal Reserve, Fed, the US central bank, which have followed each other aggressively in 2022.
Consequently, since gold does not offer interest, many investors shift their savings towards securities that offer them returns. This trend weakens the demand for the yellow metal which in turn drags the price down. But to understand how things actually stand, it is useful to observe what the central banks did, rather than said, in the year that has just ended. Because it speaks volumes about what the trend has been underway globally this year: central banks have been building up gold reserves at a pace not seen since 1967.
The World Gold Council, WGC, said last month that central banks bought 399 tons of gold in the third quarter – by far the most ever in a single quarter. According to the WGC, central banks around the world added another 31 tons of gold to official reserves in October, bringing them to their highest level since 1974. China, known for the opacity of its statistics, including gold reserves, has revealed an increase, for the first time since September 2019, of 32 tons of gold worth about $1.8 billion. Its stocks now stand at 1,980 tons, in sixth place in the ranking of countries with the largest official national gold reserves, which also includes our country.
In the new year, therefore, it is advisable to follow an old saying: when you are in Rome do as the Romans do. As soon as central banks, and the Fed in particular, realize that they cannot continue to raise interest rates aggressively without pushing the economy into recession, and suspend their rate-hiking policies, they will set the next rate hike in motion. of the precious metals market. And the Fed will likely be forced to ease its tight monetary policy in the new year as it faces signs of a slump in consumer spending and a downward spiral in the US economy.
There are other signs pointing to an upcoming upside for precious metals. But first let’s stick to a basic rule of the market and analyze the availability of the raw material. According to the WGC, they have been mined to date about 190,000 tons of gold and about two-thirds have been mined in recent decades. This exponential growth trend is in line with many other minerals, whose extraction rates, in some cases, have increased three-fold to even ten-fold in just a few decades. According to the United States Geological Survey, USGS, there are still approximately 50,000 tons of gold reserves globally that can be mined at economically viable levels..
Because the trend of gold deposits, which coincides with that of metals in general, which we have been witnessing for decades, is that of a progressive decline in the quality of the remaining reserves. The average content of gold reserves, according to data from the top ten mining companies, is now in a secular decline. Only in the last twenty years have we gone from a gold equivalent of 2.3 grams per ton in 2003 to the current average content of around 1.5 grams per ton. In addition, there have been few new discoveries of gold deposits, a clear sign that most of the easily mined metal has been depleted. The remaining depots are located in remote locations, lacking infrastructure, often requiring extraordinarily high capital expenditures. Or they are in high-risk geopolitical countries with governments likely to expropriate the mine or impose other costly forms of resource nationalism. The result is that the reserves of the yellow metal of the top ten mining companies have decreased by 33% in the last 15 years.CopyAMP code
Furthermore, mining the next gold will cost more because the scarcity of deposits requires more energy to mine the same amount of ore as before. And this aspect is destined to reverberate on the price of the yellow metal. Historically, the decline in production coincided with significant leaps in its price: in the 1970s a 19% drop in production coincided with an increase in quotations of over 1,500%, similarly at the beginning of this millennium a drop in 11% triggered a 500% increase. Today we come from two years of decline in production also due to the fact that mining companies, which traditionally focused on precious metals, are redirecting part of their capital towards so-called “battery metals” and other metals linked to the economy greens.
A further signal comes from physical stocks. There has been record demand for physical gold and silver throughout the year, which is emptying vaults in New York and London where the metals are stored by the Comex exchange and the London Bullion Market Association. A similar trend, incidentally, is manifesting itself for base metals: the London Metal Exchange will enter 2023 with the lowest inventories in the last 25 years. According to many analysts, an unprecedented situation is developing in the London market, with a relentless haemorrhage of one of the largest stocks of silver in the world. Lots of unfulfilled contracts and the drop in new contracts are an unequivocal signal: there is no metal available. Gold follows, with a slight lag, the same dynamics as silver and is a larger market where the same trends are starting to emerge.
Ultimately, while governments and central banks argue that the move to a cashless society will help prevent crime and benefit the average citizen, many are inclined to believe that the real motivation behind the “war on cash” is greater government control over the individual. One of the reasons for investing in gold and silver is also the low regard for government currencies. Throughout history, gold has maintained its value in general terms with variations On the contrary, fiat currencies have lost purchasing power: the dollar has lost 98% against the yellow metal since 1970. Perhaps, to estimate the prospects for gold in the new year, it is more realistic not so much to predict which will be the price of gold in 2023, but what will happen to the euro, the dollar, and other major fiat currencies in the new year.