The Millennials are buying more gold than anyone else? Yep, that is the result of a new study by SPDR published by State Street. We will get into the details of that study in the Story of the Week section of our report.
Gold and Silver Analysis
The gold chart below shows the tug of war that is typical in side-ways trading markets for gold. I have marked where gold, on the futures pricing market, fell below its moving averages meaning a weakening demand from the most recent trading sessions. However, the same chart shows a subsequent break back above these averages. What is happening?
This is the definition of something we call a ‘range-bound’ market. That essentially means that neither the longs nor the shorts are particularly stronger than the other. The market is about evenly divided amongst those betting long and short on the metal. Given that we are in the traditionally weaker season for precious metals during summer, I find the charts very heartening.
Meanwhile, on the COMEX futures market, we see that demand for physical precious metals has been elevated. Before I explain how we see this, I wanted to note that most of the trade on the COMEX futures market for gold and silver is simply paper positions. Combined hedging (price protection for physical users and producers) and speculative (trading paper contracts for cash returns) activities have been robust, indicating a strong market desire for exposure to gold in the market. Most contracts do not end up in physical gold exchanging hands; however, the market allows this physical exchange mechanism to occur in a couple of different ways which I will briefly explain.
The most obvious way to get gold (or silver) from the COMEX is to “stand for delivery.” This means that a long gold futures holder can file an intent to ‘take delivery’ of gold bars from a short, who provides the metal. This mechanism is supposed to ensure that short position holders are not simply dumping paper on the market to move the price and may be called to the floor to provide the metal to back up their positions.
The problem is however that the exchange does not ‘require’ shorts to deliver the physical gold, and often assists short holders in negotiating cash settlements for longs or encouraging them to enhance their paper positions to their benefit (from a cash return perspective). Meaning, the market itself encourages paper trading over physical redemption on futures contracts. That is, after all, why the futures markets were created. However, COMEX has become a great place for interested parties to take physical possession of gold and silver should they be able to locate other parties who want to provide it. Here is a table of monthly physical deliveries on the gold market.
We notice that about every other month has a surge in deliveries, which is how the market typically works. Because we are mostly dealing in futures (paper) markets, we do not need a large futures position every month. But, every month with significant ‘open interest’ in contracts attracts those who are seeking not just price exposure to gold, but the actual physical metal itself. This occurs about 6 times per year.
The second major mechanism is something called Exchange for Physical (EFP). The EFP mechanism allows for futures position holders in gold or silver in the US to exchange those positions for exposure in the OTC market, run out of the UK.
So, it does two things. One, it allows for the movement of market positions from one national market to another. Secondly, the OTC market allows for unallocated gold exposure, meaning there is physical gold backing up the market, but the gold bars themselves are not specifically owned by a given entity.
In plain English, the OTC market offers the ‘chance’ to redeem in physical gold, but the market is widely considered to trade more OTC positions than it has the actual physical gold for. So, there is no guarantee of an EFP contract being able to take physical delivery. The mechanism is explained on the CME Group website, which runs the exchange. Here is a screenshot of the process.
Clearly, there is a lot of demand for physical gold as we can see on the latest (at the time of this report) table from the market. EFP sometimes spikes in slow months for the metal future trade with lower open interest. That makes sense, as physical gold seekers may rotate their positions to London to get that opportunity of taking some physical deliveries.
The Macro View
This has been an interesting week for the US economy. The manufacturing element, which is the smaller market in the US, increased last month while the leading sector services saw a decline. Here is the tape from Monday’s data print.
While economists were right on direction for each market segment, the moves in each market were stronger than expected. Also, durable goods orders are up for the month which seems to support higher demand for those supplies used in manufacturing processes.
Further, new home sales and consumer confidence are higher this month, while housing prices still fell by 1.7% across the country. GDP grew 2.4% for the month, which is pretty good, but I wonder how long that actually lasts as we seemingly inch our way to the next recession.
Story of the Week
Here we have it. According to State Street, which published a survey conducted by SPDR ETFs on Yahoo Finance, shows that the Millennials are simply buying more gold than any other group. Their gold ETF exposure amounts to 17% of their investment, while GenX and Baby Boomers are sitting lower at 10% overall. State Street is the 4th largest asset management firm in the US.
What is of particular interest is the reasons why Millennials invest in gold. Per the report:
“More Millennials than Boomers or Gen X replied that gold ETFs are the best way to invest, with 69% for Millennials, compared with Boomers at 55% and Gen X at 35%,” reported George Milling-Stanley, Chief Gold Strategist at State Street.
Who would have thought that the recent macroeconomic troubles, when combined with demographic patterns resulting in lower employment and pay for the Millennials, would have pushed them to gold? Many market pundits would likely have picked digital assets, like popular private cryptocurrencies Bitcoin, Ethereum, and Litecoin, as the investment of choice for the younger generation.
However, this generation is no longer ‘young’ and has entered its prime earning seasons. They are likely considering how to best save for retirement, and choosing gold shows they prefer asset safety in times of distress to overall risk-based growth investments of the past. In other words, while older generations may have been busy criticizing the Millennials for their different economic & lifestyle choices, in the meantime, the Millennials used their experience in a tough employment and income market to exceed the gold investments of their parents. Tough times seem to lead to gold for everyone, don’t they?
One caveat to the trend for younger gold investors it the choice of investment vehicle. SPDR, which conducted the survey, runs the popular GLD and SLV gold and silver ETFs, respectively, the method for which Millennials prefer to invest in the metals. In other words, Millennials like the ease of buying GLD shares instead of actual physical gold. I guess you could say they are still ‘married’ to the digital investment equivalents rather than the physical.
There are numerous potential risks to owning shares of GLD instead of the physical gold product, which is the subject of another article. While I am highly encouraged by their move to gold, I would love to see some of them explore the physical gold market a little more instead of choosing a paper investment vehicle like the GLD which will not allow them to redeem shares for the real thing. Perhaps this will come with time as their tolerance for risk is exceeded due to recessionary pressures. We will continue to monitor this important trend to see how it all shakes out in the end.
Executive Summary
The gold and silver markets continue to hold up during their annual summer weak season. This is highly encouraging for potential increases in prices of both gold and silver this fall. Demand for physical precious metals on the UK and American exchanges has been steady, indicating a growing thirst for physical gold by big players in the market. Let’s see where this leads in the fall.
The US economy continues to waffle and provide some surprising, if contradictory, data points. As I have previously stated, this is normal leading up to recessions. Competing head and tailwinds in the markets will monkey around with the direction of the numbers until one side finally wins. This time it will be the bears as the economy heads into an official recession either later this year, or early in 2024. With corporate bankruptcies already surging in 2023, it shan’t be long before we get there.
Millennials are buying lots of gold, albeit in paper form. I expect many of them to convert over to the physical as the recession worsens and they reduce their exposure to all paper markets. In other words, what was a seminal event leading to increased gold investment by Generation X during the last recession in 2008 will be the same impetus for the Millennials to adopt physical gold in 2023 and beyond. You watch!
Coin of the Week
I like big silver bars, and I cannot lie! 100 ounce JBR silver bars are on sale now (at the time of publishing). If you are like the Millennials and going big into precious metals, this is your cue!
