An important change has unfolded in the global gold market. The East has been driving up the gold price, predominantly in late 2022 and the first months of 2023, breaking the West’s long standing pricing power.
Until recently, Western institutional money was driving the price of gold in wholesale markets such as London, mainly based on real interest rates. Gold was bought when real rates fell and vice versa. However, from late 2022 until June 2023 gold was up 17% while real rates were more or less flat, and Western institutions were net sellers. Most likely, Eastern central banks, and Turkish and Chinese private demand, lifted the price of gold.
For about ninety years, up until 2022, there was a pattern of above-ground gold moving from West to East and back, in sync with the gold price falling and rising. Western institutions set the price of gold and bought from the East in bull markets. In bear markets the West sold to the East. For more information read my article: The West–East Ebb and Flood of Gold Revisited.
If we zoom in on the period from 2006 through 2021 the main reason for Western institutions to buy or sell gold was the 10-year TIPS rate, which reflects the 10-year expected real interest rate (“real rate,” in short) of US government bonds.
The physical gold price was predominantly set in the London Bullion Market and to a lesser extent Switzerland. Gold trade in London can be divided in three categories:
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