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    Central Bank Gold Buying Intensifies, But They Aren’t The Only Ones

    Central banks have been buying gold for a long time, but they have not always been net buyers. The following chart from Visual Capitalist tells a tale of two economies. Good economies lead central banks to sell their gold while bad economies reverse the trend and turn them into buyers.

     

    From the early 1990s until 2008, when the Great Recession started after the failure of Lehman, central banks sold gold into a booming stock market and generally good economy. However, those same central banks have been buying literally tons of gold since the last financial crisis. And lately, they have been accelerating their purchases.

    Big Buyers of Gold

    The reason central banks are buying gold is what everyone is now talking about – instability in the currency that the world uses. That happens to be the dollar, and it is in a bit of trouble. And other countries have been noticing, hence the acceleration of gold purchases.

    This has occurred because new guidelines and regulations from the Bank for International Settlements (BIS) has put into place to protect banks from failure. Essentially, the BIS guidelines increase the amount of ‘liquid’ assets, particularly those deemed as ‘high quality’ on banks’ balance sheets.

    Those high-quality liquid assets (HQLAs) include bank stock and certain types of debt, cash, and yes gold. Gold is seen as equivalent to the other forms of liquidity mentioned because it has been a bulwark of the financial system for over 5000 years. Gold has served as money for countless countries and financial systems over the years.

    Blowout Year in 2022

    According to the World Gold Council, central banks increased their gold purchases by 152% in 2022 over those made in 2021. That is a huge increase in a year. Further, given the bank failures we have seen this year, it would not surprise me if the 2023 numbers are even bigger when they are finally totaled.

     

    Already, the World Gold Council has claimed 2022 was the biggest year ever for central bank gold purchases. I wonder what they knew that we did not in 2022? It may have been nice for them to tell us why they were buying record amounts of gold right before the US experienced their largest two bank failures in history in one week in March.

     

    ETFs and Artisanal Mining

    We now have the basic thesis of this article: the big boys in the banking system like gold and are buying lots of it. But of course, there is more to this story than that. We already knew central banks liked gold. The news here is that they are not the only ones.

    In the past couple of months, I have received two interesting inquiries with regard to the market demand for gold. Please keep in mind that regular purchases, e.g., for the average family office, typically go through a retail dealer or broker. Larger purchases are often funneled in one of several ways, which we talk about next.

    The first inquiry that piqued my interest a couple of months ago was a call I got from a group looking to set up a gold ETF fund. Ok, no big deal we have lots of those already. But the interesting part was which gold they wanted for it. They were putting together a fund to capitalize artisanal gold from around the world.

    Now without getting into too much detail and history around artisanal gold mines, I will offer a very brief synopsis. Artisanal mine means small operation and typically refers to those smaller mines operated by as little as a single person or a small group of people.

    Many times, those mines are not run by large organizations and may be in far-flung areas where it is hard to get infrastructure (e.g., water and power) or people to (e.g., desert, remote wilderness, mountainous, etc.). In some cases, artisanal also refers to the horrible practice of young slave labor mining for gold and silver.

    In any case, much of that market moves through Dubai and the UAE gold market. I believe this market is second only to the Shanghai Gold Exchange in China in terms of physical gold trade, as opposed to paper derivative trading that dominates the US COMEX market.

    The interesting thing about this request is it likely means the larger gold mines around the world have been spoken for or may not be ready for production any time soon. Many gold deposits are sitting in the ground waiting for higher prices to make the mine financing attractive enough to start a new operation.

    And when there are no more ready-made, producing gold mines of size, you go next to any gold mine production around the world you can get. This is where forming a fund to finance production from artisanal mines may come from. A very interesting development, for sure, as it speaks to the availability of gold at scale.

    Gold DORE is in Demand

    The second story comes from this week where I spoke with an investor about a large gold dore purchase. The amount requested was over $100 million worth. For those who do not know, dore is a type of bar that is often a mix of gold, silver, and potentially other base metals that needs further refinement.

     

    It is not a 99.99% bar or anything that in its current form could be traded on a commercial exchange. Therefore, the cost is a bit lower than a finished bar to account for the final refining and stamping stage. The fact that these investors want DORE means one of two things.

    First, they want gold cheaper than the finished product, and may even have trouble finding the finished product. It may be possible that no seller wants to give up that much-finished gold product at current prices. I would not personally, given the troubles we see in the global economy.

    Buying dore bars straight from the miners also provides a bit of legal assurance. When thinking about a chain of title, where we track ownership of the gold asset from its creation to the present time, dore bars provide the opportunity for the holder to own gold that is guaranteed to have never been part of a financial transaction before, at least in finished form.

    Think of it like buying a new car with the first title – nobody can dispute your ownership or claim you built it from parts with another car. Having an unencumbered legal title to your gold could be very important for an investor, especially one looking to spend over $100 million. That is a lot of financial risk if it is done the wrong way.

    Final Thoughts

    When I got into this business, I never thought I would be part of, or even privy to, these types of transactions. But that is what happens when people want to get into gold and need a new place to start. They come to people like me to exercise my connections and see if we can solve their problems.

    The most interesting aspect of this is that this interest is from NEW investors without substantive existing exposure to gold. I believe it signifies an incredible amount of new demand, and not just from mom-and-pop enthusiasts. Some big money is moving into gold, anywhere it can find it. That’s a huge bullish sign.

    Disclaimer: All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.

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