“It’s [gold] been the reserve currency of the world for thousands of years, a legitimate alternative to holding the dollar or other paper currencies. There has been a significant increase in demand from central banks to replace dollars with gold, and we’re just at the beginning of that trend. Gold will go up and the dollar will go down, so you’d be better off keeping your investment reserves in gold at this point.”John Paulson, Hedge fund manager
While non-western central banks purchased a record amount of gold in 2022, some notable investors and retail buyers have also been aggressively buying physical gold and silver.
Prominent hedge fund manager, John Paulson, has been advocating gold and mining stocks as an investment since the early 2000s. He started discussing precious metals and mining stocks ahead of the big bull move from 2008 to 2011 and has been a proactive investor in mining stocks.
Increased demand for gold & silver in Asia
At nearly five times the level of 2021, the demand for gold bars and coins in 2022 grew faster in Russia than in any other country, according to data from the World Gold Council.
The demand influx for gold has been encouraged by the Russian government. The Russian central bank in March 2022 restricted sales of foreign currency and on the same day, Putin scrapped the 20% VAT on gold bar purchases – triggering a massive surge in demand for bars and coins.
India imported a record 9,450 tonnes (333.34 million ounces) of silver in 2022, which is equivalent to 37% of the amount produced from mining annually. The primary buyers in India included electrical and solar panel makers, jewellery and silverware fabricators and individual investors. The demand from jewellers reflects the anticipated demand from the Indian public, which views gold and silver jewellery as an investment.
Furthermore, Indians tend to be price-sensitive and have a good track record of increasing their demand for gold and silver after big sell-offs. Most of the silver buying occurred in the second half of 2022 after the price of silver had declined from $26 early in 2022 to as low as the mid-$17 area. The previous all-time high for silver importation was 8,529 tonnes in 2015. Of note, the 4 1/2-year bear market in silver (and gold) ended by late 2015.
Turkey & Germany are also prominent buyers
In addition to India and Russia, Turkey was and is a prominent buyer of gold. In 2022 Swiss refineries shipped 188 tonnes of gold bars to Turkey, up from just 11 tonnes in 2021. Turkey’s demand spilt over into January 2023, as Switzerland sent another 58.3 tonnes of gold to the country. This was the most gold imported by Turkey for a single month based on records back to 2012 according to Swiss customs data.
One other notable large gold-buying cohort is the German retail investors. Annual bar and coin investment jumped 13.1% in 2022 to an all-time annual high of 196 tonnes. The surge in gold buying by the German public is in response to the highest rate of inflation in 70 years.
What is driving gold demand?
In my opinion, there are two primary catalysts driving the unprecedented amount of gold purchased by eastern hemisphere/emerging market central banks and individual investors in many countries.
First and foremost is the shift away from the dollar and into gold by the above central banks in advance of a well-telegraphed move by the eastern hemisphere/Asia coalition of allies, led by Russia and China, to reincorporate gold into the global monetary system.
Second, there’s a growing distrust of fiat currencies in general. Converting fiat currency into physical gold and silver is the best means of protecting wealth from the loss of purchasing power – otherwise known as “inflation” – due to central bank monetary policies that enable both the expansion of the supply of currency/credit and the maintenance of negative real interest rates.
I believe the current decline in the prices of gold and silver is a technical correction/pullback after the big move made by the precious sector between September 2022 and mid-January 2023. I think this pullback will set up the next big bull move in the precious metals sector. The rising demand for the physical metal will be a significant factor in fueling the next bull move.
I am not alone in this assessment. Newmont Mining has made a $17 billion offer to acquire Australia’s Newcrest Mining. In addition to its large copper resource, Newcrest also has 61 million ounces of gold reserves. B2 Gold is also spending $824 million to acquire Sabina Gold. Sabina’s Nunavut Project currently hosts around 2.5 million ounces of gold reserves and a total estimated resource of 9.1 million ounces of gold.
These two companies would not spend this kind of capital to acquire gold ounces in the ground if the management did not think that the price of gold (and silver) was going much higher. I suspect that there will be a lot more M&A activity in the precious metals mining sector during 2023.
Dave Kranzler is a hedge fund manager, precious metals analyst and author. After years of trading expertise build-up on Wall Street, Dave now co-manages a Denver-based, precious metals and mining stock investment fund.