Vietnam Considers Gold Imports to Bridge Price Gap

Something different has been happening with gold and silver since February this year. 

The gold and silver prices have been bouncing back quickly from the intermittent sharp price declines that have characterised the metals’ trading since the precious metals secular bull market began in 2001.

Gold has been range-bound in a lateral trading channel for the last three years, forming the “handle” of the thirteen-year cup-and-handle technical formation. Gold broke out of the “handle” at the end of February and hit continuous all-time highs through to May 20th of this year. 

Silver also broke out of an extended sideways trading range that was holding the price below $28. While it still has $20 more upside to break out from an all-time high (in dollars), it has hurdled a stout technical barrier that should lead to a record-high price eventually. 

The silver price has been “bouncy” relative to gold, as evidenced by the decline in the gold/silver ratio from 92 in early February to 79 (14% decline) at the time of writing. The GSR was as low as 73 in late May but has bounced while gold and silver are completing their technically corrective pullback. 

The accumulation of physical gold and silver by eastern hemisphere central banks, banks and citizens. central banks bought a record amount of gold in 2023 and, according to the World Gold Council, bought a record quarterly amount in Q1 2024. The Chinese populace has been buying gold at a record rate this year. 

Vietnam Government Looks to Gold Imports

The Vietnamese government has considered allowing companies to import gold again. Vietnam at one time was the fifth largest importer of gold. 

The government took control of gold imports in 2012 to curb the rate at which its citizens were selling the dong to buy gold, which depressed the price of the local currency. This created a supply/demand imbalance causing the price of gold there to rise above the world spot price. 

The government is considering allowing companies to import gold to increase the supply. If this happens, the local price will fall and gold demand will surge, which in turn will increase the stress on global supply. Gold purchases are already up 10% YoY YTD this year.

Gold in International Bank Reserves

The percentage of gold in international bank reserves jumped to 17.6% during 2023 – it’s even larger now; gold is now the second largest reserve asset held by central banks, surpassing the euro; while the dollar is still the number one reserve asset, its share of reserves is down 48% from 60% seven years ago; central bank gold purchases net of sales were 290 tonnes in Q1 2024, a record quarterly amount.  

The trend of reducing the dollar and the euro in central bank reserves and replacing them with gold is perhaps the most significant development in the global monetary system this century. Unequivocally it is having a significant impact on gold and silver prices. I expect this trend to continue, with gold eventually surpassing the dollar as the number one reserve asset.

Central Banks Cut Base Lending Rates

Part of the reason gold and silver are bouncing back from the recent abrupt sell-offs is that both the Royal Bank of Canada and the ECB lowered their base lending rate. This follows similar moves by Sweden and Switzerland. The market suspects the Bank of England and the Fed will start cutting in the coming months. Precious metals are responding positively to the easing of central bank monetary policy globally. 

In addition, several major central banks, including the Fed, have begun to print money. While the Royal Bank of Canada has been increasing its money supply continuously for many years, the Fed and the ECB appear to have restarted their monetary “printing presses” after two years of draining a small amount of money from their banking systems. The Fed’s M2 measure has been trending higher since October 2023.  

More significantly, the Fed’s Monetary Base is up 8.5% since March 2023.  The Monetary Base, consisting of bank reserves plus currency and coins in circulation, is the most powerful form of money supply because it is the most readily available. Moreover, most of the increase is primarily from the creation of bank reserves.

This increase in the money supply since early 2023 is the reason that inflation is running hotter than expected or desired:

The chart above shows the Bloomberg Economic US surprise index (red line) vs the Bloomberg inflation data surprise index. Economic reports have missed consensus more often than not since last August while the inflation data has been stronger than expected since February. 

The chart shows where the Fed began letting M2 rise, which explains why inflation began kicking back up again earlier this year. Given that inflation is hotter than expected,  the Fed has its hands tied with cutting rates to stimulate economic activity.

Despite the Fed’s “hawkish” stance, financial conditions are back to being as easy as they were after the pandemic and the Fed has been slowly pumping reserves into the banking system. Gold and silver have responded to this, with their prices moving higher despite the Fed maintaining the highest Fed funds rate since June 2007.

Seasonal Gold Buying

So far there has not been any indication that the enormous physical gold and silver buying by the eastern hemisphere is showing any signs of letting up. That said, there could be a seasonal summer slow-down. 

The current technical correction may or may not last through the summer but the seasonally strongest period of gold-buying by India begins in late August. This pushes the gold price higher during Q4 almost every year. Driven by the relentless buying of physical metal by the eastern hemisphere with the easing of monetary policy by Western central banks, gold and silver prices may be considerably higher than now by year-end.