Gold came under selling pressure early this morning but rebounded to trade up $7 to $2,524, which would be its highest closing price on record.
Since the price hit an intraday record of $2,531 last week, things have been surprisingly quiet in the gold market, which is a positive thing in a bull market.
Many are struggling to buy gold despite the imminent Federal Reserve rate cut because the reasons for the price rise are unclear. A big one is the US weaponizing the dollar in the wake of Russia's invasion of Ukraine. This is compelling, especially considering that China's central bank is building up its gold reserves. But there are equally compelling reasons for gold.
A simple gold case
If you're a wealthy Chinese investor with cash, what do you do?
1) Real Estate
This was the obvious answer for decades: money poured into real estate, making huge profits, but ultimately leading to ghost cities being built and a significant bubble that governments are actively trying to deflate, causing prices to fall and the craze to reverse. Now, real estate is no longer an investment.
2) Stock Market
Shanghai Comp Monthly
There was once a time when Chinese stocks delivered big returns, but that time is nearly a decade gone. The Shanghai Composite Index was the worst performing in the world again this year, and has been barren gold since 2015. Fast-growing tech companies are trading at ridiculously low valuations, but Beijing is determined to kill them. Once again, they're a no-go.
3) Products
Commodity investing in China has some unique characteristics compared to other regions, such as the active trading of iron ore and rebar futures. As the Chinese economy slows, these commodities and others are in bear markets, and so are their producers. Of course, they are still tradeable, but the days of easy money are long gone and they are certainly less popular.
4) What's left?
Capital controls mean Chinese investors can't invest in many places, but they're still trying to get in. There have been some instances where NAVs have gone up substantially. dislocation They do invest in foreign-focused ETFs, but the options are limited, signaling strong demand for some diversification.
5) Gold
Not all the money is flowing into gold, but physical gold is available in China and compared to other assets, gold shines at the moment. Recent reports highlighting the increase in investment gold import quotas for Chinese banks is a sign of this. The price rise is also generating its own momentum.
To me, there is no mystery here. Chinese capital will continue to flow into gold. If the government provides real stimulus, support for capital markets, support for real estate, etc., that may change, but until that happens, gold serves as a safe store of value.
Gold Monthly
