Bullion analyst Sanjiv Arole delves into the intricate journey of gold prices in 2023, drawing parallels with India’s Cricket World Cup saga. Despite the metal’s surge beyond $2,000 per ounce, the unwavering influence of Federal Reserve chief Jerome Powell, marked by interest rate hikes and statements, remained a formidable obstacle. Arole explores the significant shifts in the gold market, including HSBC’s groundbreaking move to tokenise gold ownership and the Dutch central bank’s inclination towards a new gold standard, contemplating their potential repercussions on global trade dynamics.
In many ways, India’s 2023 World Cup campaign almost mirrored its triumphant 1985 World Championship of Cricket held in Australia. Then, they had remained unbeaten in the championship to win the finals. It appeared that 2023 would be an encore as the Indians stormed into in the finals with a 10-0 record in earlier games. But alas, it was not to be as Australia once again proved to be their nemesis in the finals. Just like Australia has been India’s nemesis in cricket, gold too has its own nemesis in the last couple of years in the form of the Fed chief Jerome Powell.
In 2023, gold has to date a fairly spectacular run as it crossed the $2,000 per ounce barrier several times in the year with a high of $2,048 per ounce on 13th April, 2023 (London pm fix, kitco.com). In fact, since 7th October, 2023, when Hamas abducted and killed several Israeli civilians, gold has crossed the $2,000 per ounce on more than a few occasions, only to be forced back below that level due to some comments or stance taken by the Fed chief.
This has been the story so far during 2023 and even before. Ever since the Fed chief decided that the only way to tame the multi-year high US inflation was by hiking interest rates, gold has been subdued. For, in spite of several positive factors in favour of the gold price galloping away past its all-time high levels of around $2,077 per ounce attained during the pandemic years and scaling further high beyond $2,100 per ounce, Jerome Powell has stood in its way like a rock thwarting all efforts by gold to break free.
There were periods when gold had several factors in its favour; the Ukraine war, a 2008-like situation when several banks in the US went under and even Credit Suisse went under to be gobbled the UBS, economic slowdown, high and volatile oil prices, high inflation as the world climbed back from the pandemic, fears of an impending recession, particularly in the Western world, slowdown in China, geo-political
tensions across the globe apart from the Ukraine war, high US bond yields, US external debt, high cost debt servicing of US external debt, US unemployment numbers, US economic data, the US dollar, ‘irrational exuberance’ in US stock markets, etc.
Even when all parameters were positive for gold, and every time when gold threatened to take off, the Fed either raised interest rates or made a telling comment to pour cold water over gold’s aspirations. News about the Fed pausing interest rate hikes saw gold up and running only to pull back once Jerome Powell uttered anything contrary to it.
But, despite all the odds stacked against it, gold had a roller coaster ride in 2023 with more ups than downs. The average gold price till the end of the Thanksgiving week has been $1,931.96 per ounce as against the predicted average gold price of around $1,859 per ounce for 2023 by a group of renowned analysts for an LBMA survey in January-February 2023. Then, even the recent spike in gold following the events of 7th October, 2023 followed by the Israeli attack on the Hamas in the Gaza strip saw the gold price reach a high of well over $2,000 per ounce intra-day at least a couple of times, before even closing at $2,006.60 per ounce on 21st November, 2023.
But following comments attributed to the Fed chief that a hike in interest rates during 2024 was not totally ruled out, the gold price dipped below the $2,000 per ounce again. However, in a startling, but welcome turnaround, even when a truce was announced in the Israeli war on Hamas, to swap hostages and Putin saying that the Ukraine war was a tragedy that needed to end, gold did not go under as expected but soared back above the $2,000 per ounce mark to reach $2,004 per ounce intra-day on 24th November, 2023 and even closed marginally above $2,000 per ounce (London pm fix, kitco.com). So, what caused gold to buck the trend despite the apparent decline in tensions in both the ongoing wars?
The piece de resistance was the reading of the Fed minutes that most of the board members were very cautious about rate hikes in 2024! Does it mean that the tide has turned for gold? For, if the fear of rate hikes is out of the way, then, gold is well poised just above the $2,000 per ounce to soar ahead on any positive news for the yellow metal. At long last, gold seems to be at the right place at the right time.
Not only is gold poised on the price front, but there are indications that there could be some changes in the way gold is traded in the international markets. Winds of change are blowing across the gold markets in London as well as Europe. Consider the following:
(a) HSBC to tokenise ownership of gold held in its London vaults: A news report in kitco.com quoting Bloomberg follows. HSBC Holdings Plc, one of the world’s top bullion banks, has announced the launch of a platform that utilises distributed ledger technology (DLT) to tokenise the ownership of gold held in its London vault as it looks to help usher in the digital age for the London gold market. Accordingly, the new system creates digital tokens representing gold bars, which can then be traded through the bank’s single-dealer platform. This approach “generates a permissioned digital representation of clients’ physical gold holdings”. The system is also designed to make investing in gold more accessible, as each token issued by HSBC is equivalent to 0.001 troy ounces versus the standard 400 troy ounces for a London gold bar. While the service will initially focus on institutional investors, HSBC said in the future, the system will allow for direct investment in physical gold by retail investors as long as local regulations allow it. While there have been other attempts to tokenise gold in the past, the entry of HSBC into the tokenised gold market is notable as the bank is one of the world’s largest custodians of precious metals and one of four clearers on the London gold market, which processes more than $30 billion in gold transactions every day. There are currently around 698,000 gold bars stored in vaults in the Greater London area, valued at around $525 billion by the LBMA. However, the London gold market still relies on manual record keeping and conducts trades entirely over the counter. There are also plans to add other metals as well. As HSBC is one of the four clearing banks in London, the other three being UBS, J P Morgan and ICBS Standard Bank.
The questions that come to mind are: Is this a game changer move by HSBC? Or will it be confined to retail investors? As HSBC is a clearing bank in the London market, will other banks follow? Will it change the functioning, storage, etc. of gold in the London bullion market? Once the whole gold passing through the London bullion market is tokenised, will it be essential to store all allocated gold in refined bar form? What further impact can be envisaged in the London bullion market because of the move? Will such tokens compete with Crypto currencies at the retail level?
There are two schools of thought on the HSBC move, one school feels that it is not certain that the move will revolutionise gold trading or retail purchases of bullion. Moreover, they point out that OTC market functions well for the professional participants. Retail investors already have platforms available for purchase. The bottom line is that most in this group opine emphatically that they do not see any upheaval in the markets due to the HSBC move. However, some opine, that said, it is an interesting development and given the small denomination could perhaps help to re-monetise gold in some way. Let’s see how it works out!
The other school of thought believes that sooner or later other banks will join HSBC in tokenisation of gold and the smaller denomination and digitisation of gold could have far reaching impact on the London gold market and ultimately change the way the gold markets function or governed in London. That in turn could have far reaching consequences on trading of gold in the international markets. Some aver that “It is big … game changer in real terms. It is too early to say anything in the matter. The jury is very much out.
(b) Dutch central bank admits it is prepared for a new gold standard: In a recent interview, the Dutch central bank (DNB) shared that it was equalising its gold reserves, relative to GDP, to other countries in the euro-zone and outside of Europe. This has been a political decision. If there is a financial crisis, the gold price will skyrocket, and official gold reserves can be used to underpin a new gold standard, according to DNB. These statements confirm news circulating over the past few years about central banks having prepared for a new international gold standard.
Wouldn’t a central bank that has one primary objective, maintaining price stability, serve its mandate best by communicating the currency it issues can be relied upon in all circumstances? By saying gold will be the safe haven of choice during a financial collapse; it would indicate that DNB does not believe that its own currency (the euro) can weather all storms. Indirectly, DNB encourages people to own gold to be protected from financial shocks, making the transition towards gold-based monetary system more likely.
It must be borne in mind here that the DNB, which had around 1,704 tonnes at the beginning of the 1990s, sold off gold regularly to end up with 612.5 tonnes by 2009, the same level even today. By saying that it would now shore up its gold reserves to the same proportion that the Bundesbank has with its total reserves, the DNB has signalled its intentions to buy gold in the future. Will that result in a cascading effect on other countries in the euro zone?
For, though France, Germany and Italy still have huge quantities of gold as reserves, there are others like Sweden, Switzerland, Portugal, the ECB, the DNB, and the bank of England in the UK have sold off its gold since the 1990s and have very low gold reserves compared to France, Italy and Germany. Should the rest of the countries in the euro zone and elsewhere also follow the DNB and decide to buy gold towards preparing for a new gold standard, then all bets could be off and we could witness a changed scenario for gold.
Meanwhile, it is being said that China continued to sell US bonds for the 5th consecutive month by reducing holdings by $16.4 billion, a new low since 2009. Moreover, China has been net sellers of US bonds in 20 of the past 22 months. In fact, over the last decade, China reduced its US bond holdings by 37%, net selling bonds worth $514.6 billion, down from its net peak level of $1.32 trillion in 2013. China perceives that the secret behind US dominance in trade, finance, military, the USD, etc. is being funded by the US treasury bonds.
China has made it amply clear that it would not remain passive to US hegemony. Not only has China liquidated a substantial portion of its US bond holdings, but has been regularly adding to its gold reserves which have shored up to around 2,215 tonnes. Many China watchers believe that the actual gold reserves with the Chinese Peoples Bank could be several times that quantity, even 10 times. On the other hand, bond yields have been at 16 years high at over 5%. Quite suddenly, the sales of US treasury bonds have slowed down in recent times. Moreover, high cost servicing of this external debt could reach 3% of the GDP by 2028. Thereby, compounding matters for the US.
Then, it is not just China that is adding gold to its reserves, but Russia, Turkey, India and many more countries have been on a gold-buying spree to guard against a shock to the global economy due to any reason. As if that is not enough, the Dutch move to prepare itself for a new gold standard may spark a wave of other European central banks joining the bandwagon. Would all of the above result in a challenge to US control over the markets or the hold of the USD on most trade transactions? It is pretty apparent that most countries would want to trade in their own currency. China has a pact with Saudi for oil payments in the Chinese Yuan/Renminbi. Even India has made payments for Russian oil in Rupees and Russia has tried to get its dues in Roubles.
Although, the Euro was born primarily to float an alternate to the USD and most Europeans do not see eye-to-eye with the US on most matters of trade, culture and finance, it is highly unlikely that the EU or the rest of Europe would challenge US hegemony over global matters. They would not like to be siding with either China or Russia to bring down the USD reign. Here political bondage would matter far more. Even if the EU backs a new gold standard it would not be at the expense of the US. On the contrary, many experts in the US exhort the US Fed to go in for a new gold standard. That could in turn block the Chinese move to catch the US in a tight corner.
As far as India is concerned, a new gold standard or the USD continuing its reign would not really change things. For, although it has over 22,000-25,000 tonnes of gold in private holdings, all attempts to monetise that gold have failed. India cannot suddenly overnight become the manufacturing hub of the world nor can software dominance make its currency any stronger. Probably, the only way that India can get back its lost glory by becoming an economic powerhouse is by tapping its vast mineral resources (gold, diamonds, etc.) by eschewing its apathy towards mining (gold and diamonds in particular) and make a concerted effort to utilise the buried treasures.
Finally, will the sum total of all of the above result in a tsunami that changes it all and revolutionise the global markets? Or will it be a mere storm in a tea-cup? Whatever it is, let’s see how it pans out. Paraphrasing cricket commentator Bill Lawry, one could say, “It could all begin here in the London gold market”.