A Reason for Bullishness: Robust Demand for Physical Gold

Although gold has been one of the best-performing assets in 2022, it has faced significant headwinds due to rising interest rates and a strong dollar. Members of a panel discussion during the London Bullion Market Association’s (LBMA) annual precious metals conference agreed that gold and silver prices may still face headwinds in the near term as investors continue to anticipate an aggressive Federal Reserve fight against inflation. But they were bullish on the long-term potential of the precious metals market.

Most of the panelists agreed that the Fed will continue raising rates to battle persistent inflation. But some questioned whether the central bank can actually win the inflation fight.

DRW Investments portfolio manager Darren Botha said he doesn’t think the Fed can raise rates high enough to slay inflation and that it will be forced to abandon the tightening cycle due to the massive government debt.

The central bank will not be able to get interest rates up to where they need to be to get inflation under control. When rates eventually peak, that will be a good environment for gold.”

Peter Schiff recently called it a “massive fiscal timebomb.”

The panelists generally agreed the paper markets for gold and silver have been particularly weak in recent months. But they also noted the demand for physical gold and silver has been strong, particularly in Asia and the Middle East. In fact, we’ve seen a steady migration of gold from West to East. New York and London vaults have reported an exodus of more than 527 tons of gold since the end of April, according to data from the CME Group and the London Bullion Market Association. At the same time, gold imports into China hit a four-year high in August.

Bluecrest Capital Management portfolio manager Amir Ravan said that while gold has underperformed in dollar terms, it makes sense to hold the metal in non-dollar terms. He noted a solid block of nations buying gold and trading among themselves to diversify away from the US dollar. Ravan also called gold an attractive global currency because it has no “geopolitical taint.”

UBS global head of precious metals forwards and physical trading Matt Slater also brought up strength in the physical gold and silver markets, saying it reveals strong broader market potential down the road.

Gold is ultimately a physical market and that tells you what the trend is. We just can’t make enough gold and silver products.”

Slater also reminded the audience of gold’s safe haven appeal, saying that having some gold “allows you to sleep at night.”

Botha agreed.

The Traditional 60/40 portfolio is having its worst year in 100 years, so there is a case to be made for holding other assets like gold.”

This dovetails with points Peter Schiff made during a recent interview with Charles Payne on Fox Business. Payne mentioned people talking about “the death of gold.” Peter said, “I didn’t get the memo!”

And had I gotten that memo, I would have just thrown it in the trash. But what a lot of people don’t realize about gold is that it’s money.  It is liquidity. It’s everything else that loses value in relationship to gold. Gold is a better form of money than anything governments have come up with to replace it. And in times like this, where we have inflation that’s going to run out of control, and central banks that are powerless to rein it in because they’ve created it, and they’ve created economies that are dependent on it, more and more people are going to be returning to gold.”