Who is the ‘massive player with deep pockets’ behind gold’s surge?A powerful force is stalking the world’s gold market. It isoperating in the shadows. Whoever it is seems insensitiveto cost. None of the normal footprints are visible on the London bullionmarket or the Chicago Mercantile. Retail gold bugs have not been buyers: ETFgold funds have been shrinking since December. The crowd is piling into theBitcoin scam instead.
Yet gold has smashed through a four-yearbarrier around $US2000 an ounce, rising in parabolic fashion since mid-February, and hitting an all-time high of $US2431 on April 11. Is somebody preparing for an escalation of the shadow Third World War?
“It is not a Western institution behind this.It is a massive player with very deep pockets. I have never seen this kind ofbuying before,” said Ross Norman, a veteran gold trader and now chief executiveof Metals Daily.
Gold has been ratcheting up fresh recordsagainst the headwinds of a strong dollar, a 70-point jump in 10-year USTreasury yields, and hawkish talk from the Federal Reserve. This mix wouldnormally spell trouble for gold.
Whoever it is seems insensitive tocost. Central banks do not behave like this. “They buy on the London benchmark, and they don’t chase theprice,” says Norman. This rally is happening off books in the OTCmarket.
Yes, China’s central bank has been adding toits declared gold reserves for 17 consecutive months, part of the gradualportfolio shift away from US Treasuries and European bonds by the Global South. Dollar weaponisation since the war in Ukrainehas unnerved every country aligned with the authoritarian axis of China andRussia.
None can feel safe parking money in Westernsecurities after Russia’s foreign reserves were frozen.
Yet, the scale is modest. The World GoldCouncil said central banks bought a net 18 tonnes in February: 12 in China, sixin Kazakhstan and India, four in Turkey, partly offset by Russian sales. Thishardly moves the needle.
There is a strong suspicion among gold experts thatChina is behind the surge in buying, building up a war-fighting bullion chest.
The Chinese people certainly have been buyinggold, creating traffic jams at the Shuibei jewellery hub.
Precious metal is the only refuge from theproperty crash and the slump on the Shanghai bourse. Tightening capitalcontrols make it hard to smuggle serious sums abroad. But this alone cannot account for the pricesurge, either. Norman says the gold flow to Asia has been within normal bounds.
Solving the mystery
So let me take two stabs at this mystery – onegeopolitical and one financial.
It has been clear for three years that Russia,China and Iran are operating in collusion, each feeding opportunistically oneach other. All three have fostered belligerent hyper-nationalism as a meansof regime survival, and all aim to press their advantage against a fatallycomplacent West before the window of opportunity closes. This menace on three fronts has reached a dangerous juncture.None of the major democracies have put their economies on a war-time footingdespite the obvious threat. The West has dropped the ball on Ukraine – or worse, it ispreventing Ukraine from hitting Russian oil facilities – and has therefore leftthe door wide open for a knock-out blow by the Kremlin this northern summer. Iran has been emboldened by Russian President Vladimir Putin’smilitary comeback. It is also flush with money.
US President Joe Biden is so worried aboutrising petrol prices that he has turned a blind eye to sanctions busting,letting Iran sell as much crude as it wants.
This has enabled Tehran to advance its pawnsin the Middle East, and now to risk a direct missile strike against Israel.
The third shoe has yet to drop, but Chinaknows the West has run down its stock of military kit trying to contain theseother two crises.
Chinese President Xi Jinping may never have abetter moment to tighten the noose on Taiwan with a naval and air blockade,gaining a stranglehold over the West’s supply of advanced semiconductors thatcan then be used as a bargaining chip. How would the democracies respond to this?
A pandemic of spending
There is a strong suspicion among gold expertsthat China is behind the surge in buying, building up a war-fighting bullionchest through state-controlled banks and proxies.
But others, too, can see that we are livingthrough a fundamental convulsion of the global order, and that the dollarisedfinancial system will not be the same at the end of it.
Gold is the hedge against dystopia.
However, there is a parallel explanation.COVID-19 finally broke our spendthrift governments.
The talk in hedge fund land is that some bigbeasts are taking bets against “fiscal dominance” across the West It is a collective judgment that too many countries have pushedpublic debt beyond 100 per cent of GDP and beyond the point of no return underprevailing economic ideologies and political regimes. Budget deficits have broken out of historical ranges and arerunning at structurally untenable levels for this stage of the cycle. Central banks will bottle it – under this scenario – to mop upissuance of treasury bonds. They will let inflation run hot to help states whittle downdebts by stealth default. You might argue this is what they already did by letting ripwith extreme money creation during the pandemic. The Bank of Japan is refusing to raise rates above zero or haltbond purchases, even though core inflation is 2.8 per cent and the Rengo wageround is running at 5.2 per cent. This is what a debt trap looks like. With a debt-to-GDP ratioabove 260 per cent, Japan cannot return to sound money without risking a fiscalcrisis.
Olivier Blanchard, global debt guru and former IMF chiefeconomist, once told me how this would unfold by the mid-2020s. “One day the BoJ may get a call from the finance ministrysaying, ‘Please think about us – it is a life-or-death question – and keeprates at zero for a bit longer’,” he said. The European Central Bank is also in a debt trap. It continuedto buy buckets of Club Med bonds even when inflation was over 10 per cent. This was patently a fiscal rescue for semi-solvent states. The ECB has backed off for now but will be forced to shieldItaly again with fiscal transfers disguised as QE in the next downturn. The Fed has largely monetised the Trump-Biden jumbo deficits. It now faces an invidious choice: either it stays the courseagainst inflation, at the risk of a US funding crisis, a commercialproperty/banking crisis, and recession, all ending in a return to QE and fiscaldominance; or it cuts rates hard and fast before inflation is under control,also ending in fiscal dominance.
Is gold sniffing this out? Of course, the gold spike may be nothing more than wolf-packspeculation by funds orchestrating a squeeze on bullion shorts through theoptions market, knowing this sets off a self-fuelling feedback loop. If so, therally will short-circuit soon enough.
My bet is that a big animal with a Chinese accent is bracing forgeopolitical or monetary disorder on a traumatic scale.
