Some perspectives on causes of changes in the POG from past years from details on the World Gold council website which I found rather interesting. One can conclude that Central bank gold buying and flows into and out of gold ETFs have a significant impact on the POG (see images below). If we see Gold ETFs go from net outflows to net inflows we will likely see a significantly higher POG (assuming central banks continue buying gold at the same level as in the past 18 months) if past relationships hold.
No idea when this will happen but it looks like ETF flows is the thing to watch for a change in the POG (and central bank buying). The charts below are from the World gold Council (the ETF flows are updated every week).
My analysis is set out below supported by charts (I am not providing investment advice, rather observations on data from the World Gold Council and what seems to have influenced the POG in past years which may not be repeated in future).
Note the following:
- Since about 2016 they has been a very strong positive relationship between the POG and holdings of gold ETFs (see image 3 below) until about the 3rd quarter of 2022 when central banks started buying a lot more gold (see image 4 below). It seems fair to state that if central banks did not substantially increase their gold buying from the 3rd quarter of 2022 the POG of gold would have been a lot lower in late 2023 and 2024 ie less than $US1,800 maybe less than $US1,700. Central bank buying seems to be the chief reason for the increase in the POG in the last 15 months.
- There is also a positive relationship since 2000 between POG and gold ETF holdings but less positive than since 2016.
- In 2019 and 2020 there was a big increase in the POG from about $US1,300 to over $US2,000 which coincided with very strong inflows into gold ETFs (see image 2 below) and central bank buying of gold was quite low in 2020 and about average in 2019. The POG fell in 2021 and to mid-2022 when there were outflows from gold ETFs but the outflows were not as strong as the inflows in 2019 and especially 2020. The big inflows into gold ETFs in 2020 and to a much lesser extent 2019, coincided with lower interest rates.
- Gold ETFs have had outflows since 2020 (see first 2 images below) except for March quarter 22 when Russia invaded Ukraine hence the spike in the POG in March quarter of 2022 (see image 1 below).
- central bank buying took off from Q3 2022 which coincided with a significant outflow from gold ETFs with the POG falling significantly in Q3 2022 (seems to be due to big ETF outflows). It was not until Q4 2022 when outflows of gold ETFs slowed a lot and continued to be a lot lower for subsequent quarters, with continued large central bank buying, that the POG increased significantly.
- a lot of so called experts expect POG to increase significantly in 2024 with many targeting a price of $US2,300 to $US2,400. Despite talk of possible interest rate cuts since December 2023 there has not been any discernible reduction in ETF outflows to 19 January. Based on my analysis I do not expect much of a change in outflows from gold ETFs and the POG until at least the first USA Fed rate cut upon which there is a lot of speculation it could be as early as March 24 or as far away as late 2024. Even if there is a rate cut in the USA the POG may not increase much until there are inflows into gold ETFs and who knows when and if that will occur. All this assumes central bank gold buying continues to be as high as it has been in the last 18 months.
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