China’s Consistent Gold Accumulation

China has once again increased its gold reserves for the sixth consecutive month. This action aligns with the global trend of central banks expanding their holdings in response to escalating economic and geopolitical risks. According to data released by China’s State Administration of Foreign Exchange (SAFE), the country’s gold reserves rose by 8.09 tonnes. As a result, China’s total gold reserves reached 2,076.47 tonnes by the end of April.

China’s Gold: Factors Behind China’s Gold Purchases

The World Gold Council (WGC) attributes the surge in gold purchases by China to a strong rebound in consumer spending during the first quarter. This rebound followed the post-COVID relief rally. The recovering domestic economy and healthy income growth in the country have reignited domestic consumption. Simultaneously, the notable performance of gold prices has sparked significant interest among investors, driving their inclination towards gold as an investment option.

Rising Bankruptcies and Economic Shifts

Over the past few months, there has been a notable rise in the number of bankrupt companies. This increase can be primarily attributed to inflationary pressures arising from rising labor and energy costs. Additionally, two factors have played a significant role in driving these bankruptcies: escalating interest rates and the ongoing process of deglobalization in the economy.

China’s Unique Economic Cycle

China finds itself in a distinct economic cycle compared to other nations. Despite emerging later from the constraints of the COVID-19 crisis, the country is currently enjoying a robust economic recovery. Retail sales experienced a remarkable surge of 20% last month. Additionally, May 1st marked a significant milestone as it recorded a record-breaking number of rail passengers. On that day alone, 19.7 million Chinese individuals traveled by train, showcasing the scale of transportation activity.

Changing Investment Landscape

Interestingly, the ongoing recovery in China does not result in a significant increase in investments by U.S. companies, particularly in the realm of Private Equity (PE). U.S. investment, including PE, has experienced a notable decline since the COVID-19 crisis. Unfortunately, there are no indications of a positive recovery in this regard at the moment. This decline in PE activity is evident globally, with China experiencing a particularly sharp drop.

Chinese Exports and Trade Dynamics

While U.S. investment in China is shrinking, Chinese exports are regaining momentum, as witnessed by an impressive 8.5% increase in April, surpassing expectations. Notably, exports to Russia have seen a significant upswing. Trade between China and other BRICS countries has also been on the rise, with a notable shift occurring over the past twenty years.

BRICS’ Growing Influence

Twenty years ago, the G7 countries accounted for 42% of global GDP, while the BRICS countries represented only 19%. However, in the present day, the BRICS’ share of world GDP has risen to 31.5%, surpassing that of the G7 countries, which now stands at 30.7%. The BRICS bloc is now considering the inclusion of nineteen additional countries, including several Arab nations. Furthermore, the use of the dollar within the group is increasingly being questioned, and Saudi Arabia’s potential entry into the club would challenge the petrodollar system established since 1970.

Gold Purchases and the Emergence of a New Bloc

The gold purchases made by central banks, including China, play a pivotal role in setting the foundation for the emergence of a new bloc. This marks a preparatory stage for potentially distancing themselves from the G7 system. The confidence in the dominant position of the U.S. dollar is being challenged, leading more countries to contemplate breaking away from the current global order.

However, it is important to note that this separation is not an immediate process. These countries still rely on the support of their former key partners as they navigate this transition. Similar to a couple going through a breakup, they don’t immediately disclose finding new alliances, but rather highlight existing relationship issues to negotiate a favorable and economically advantageous separation.

In the medium term, trade between China and its trading partners outside the G7 could undergo significant changes. This shift may involve the de-dollarization of reserves and create a pathway for a broader de-dollarization of trade, leading to a different framework for conducting international commerce.

The Role of Gold in the New Trading System

This de-dollarization process involves assigning a more significant role to gold. It is becoming increasingly evident that gold will play a crucial role in the emerging trading system. China is actively encouraging its population to consider gold as a viable savings option.

Notably, several major Chinese banks, including China Construction Bank, Postal Saving Bank of China, and Bank of Communication, have introduced a service that allows customers to convert their renminbi (RMB) accounts into gold accounts. This convenient access to metal accounts is likely to drive increased demand for physical gold from individuals.

China’s Gold: Demand for Gold in Different Regions

The persistently high price of gold is primarily driven by strong demand from two main groups: Asian individuals and BRICS central banks. However, in Western regions, the demand for gold is relatively weak. This is evident from the minimal exposure and allocation of funds to gold-backed exchange-traded funds (ETFs) like GLD. Such indications suggest a limited appetite for gold among Western investors.

Investor Sentiment and Mining Industry

During a recent mining conference, I observed a certain skepticism toward the gold sector. There seemed to be less interest in gold compared to metals associated with the energy transition. Overall, investors in Western countries appear to be missing out on the current rise of gold. The upward trend in gold prices over the past six months is happening amidst a climate of denial, evident from the lack of interest in mining companies that should typically accompany such a surge in precious metals. This disconnect between mining and gold prices signals a lack of investor enthusiasm in the precious metals sector.

Speculation and Disconnection from Physical Demand

Given the prevailing circumstances, it is understandable to witness Western speculators taking bearish positions in gold at these high levels. As this rise lacks fundamental drivers and momentum, it tends to attract bearish speculators who may not perceive the physical demand occurring at a different level.

This speculative activity, disconnected from physical demand and blindly executed, extends to other metals as well.

Copper Market Dynamics and Investor Behavior

In anticipation of an economic downturn and recession, many funds have taken bearish positions in copper. As a result, copper prices have fallen below their 200-day moving average for the first time this year. These funds hope for the evolution of the chart pattern in copper, which initially displayed a rally during the summer, into a bearish flag once the current consolidation channel is breached.

However, the investments in bearish positions fail to take into account the low stocks available on the London Metal Exchange (LME). Currently, the LME stocks are at a five-year low and show no signs of significant seasonal replenishment. This situation is further exacerbated by the Chinese recovery, projected lower mine production in 2022, and reduced forecasts for 2023. These factors collectively contribute to increased strain on copper stocks.

Consequently, these circumstances present a challenge for investors who typically rely on copper as an economic activity indicator. This is applicable to both Europe and the United States. Additionally, the strategy of shorting copper, widely known as “Dr. Copper,” has consistently yielded positive results. This has been observed during anticipated economic downturns over the past three decades.

China’s Gold: The Importance of Physical Supply

Despite the bearish speculators relying on macroeconomic factors, it is crucial to acknowledge the historic decline in copper stocks. This decline may soon present a challenge in securing the supply of this valuable metal. Ultimately, what matters most is the finite quantity of physical metal. When physical stock becomes scarce, regardless of the increasing number of derivative contracts on the metal, those who possess the physical metal dictate the rules. In this context, promises made on paper contracts hold weight only for those who maintain trust in their counterparts.

Late Realization and Volatility in Metal Prices

When copper reserves are depleted, there may be a realization of the disconnection between the paper market and physical supply. This can impact the silver market as well, potentially leading to extreme volatility in metal prices.

In summary, China’s continuous addition to gold reserves reflects a global trend among central banks amidst geopolitical and economic uncertainties. The country’s distinct economic cycle drives a vigorous recovery with soaring retail sales and record-breaking rail passengers. While U.S. investment in China declines, Chinese exports rise, particularly to Russia. The growing influence of the BRICS bloc challenges the dominance of the U.S. dollar.

Central banks’ gold purchases prepare for a potential divorce from the G7 system, signaling a changing landscape for international trade. Despite Western disinterest, Asian individuals and BRICS central banks drive physical gold demand. The mining-gold price disconnect suggests limited Western investor enthusiasm.

Speculative investments detached from physical demand affect metals like copper. Neglecting low stocks and potential supply strain, downward positions create market complexities. The realization of the paper-physical supply disconnection may heighten metal price volatility.

The evolving global economic landscape shapes investment strategies and influences international trade, driven by gold’s role and dynamics of metal markets.