The West loses control over the gold price

A significant shift has occurred in the global gold market. The East has driven up the price of gold, particularly in late 2022 and the early months of 2023. This has disrupted the long-standing price-setting power of the West, which until recently primarily influenced the gold price.
 

The West Loses Its Influence

From late 2022 to June 2023, gold rose by 17%, despite relatively stable real interest rates and net sales by Western institutions. Eastern central banks and demand from Turkish and Chinese individuals have likely driven up the demand for gold, thereby increasing its price.
 
For nearly ninety years, the gold market saw a consistent trend of above-ground gold flows between the West and the East, synchronized with rising and falling gold prices. Western institutions set the price of gold, buying from the East during bull markets and selling to the East during bear markets. Over the past fifteen years, the primary reason for Western institutions to buy or sell gold was the 10-year TIPS yield, which reflects the expected 10-year real yield on U.S. Treasury bonds.
 
Previously, the physical gold price was primarily determined in the London Bullion Market and, to a lesser extent, in Switzerland. Gold trading in London could be divided into three categories: direct transactions in large bars (weighing 400 oz), trading large bars through Exchange-Traded Funds (ETFs), and arbitrage trading that profited from price differences between COMEX futures and London spot prices.
 
Historically, TIPS yields, the UK's net gold imports, Western ETF positions, and COMEX open interest were all correlated with the gold price—until the war in Ukraine broke out in late February 2022. Data shows that gold prices have become increasingly less correlated with real interest rates, suggesting that London's influence over the gold price is declining.
 

The East in Pursuit of Gold

Turkey and China have emerged as significant players driving up the price of gold. In January 2023, Turkey's net gold imports reached a peak due to the depreciation of the Turkish lira, prompting citizens to invest in gold. China also showed stronger net imports in late 2022 and early 2023. Although the Chinese are generally price-sensitive, net imports to the mainland were surprisingly strong in November and December 2022, as well as in February and March 2023.
 
There are also indications that central banks in the East may be secretly buying gold. This is suggested by a discrepancy between the World Gold Council's quarterly estimates and what central banks report to the IMF. Central banks do this secretly, as a public announcement would cause the price to rise excessively, resulting in less value for their money.
 

Conclusion

The most logical explanation for the recent behavior of gold is a combination of hidden purchases by central banks in emerging markets and strong private demand in Turkey and China. It is also possible that the World Gold Council's estimates of hidden purchases by central banks are too low, as these estimates declined during the price peak in late 2022 and early 2023.
 
If the East gains more control over the price of gold, the metal could play a more central role in the international monetary system. The question remains whether the West will regain control over gold prices or if this is a permanent shift. The answer will have consequences not only for the gold market but also for global economic stability.
 
Based on an article by Jan Nieuwenhuijs – Numismatic Expert & Journalist at Gaineville Coins.
 
Disclaimer: The Silver Mountain does not provide investment advice, and this article should not be considered as such. Past performance does not guarantee future results.