Central Banks Fuel Gold Rally While Western Investors Sit Out

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Coming up don’t miss our exclusive interview with Philip Newman, managing director of Metals Focus. Money Metals’ Mike Maharrey and Philip break down the silver supply deficit as well as where the demand for silver is coming from. 

Philip also describes how there's been a bit of a disconnect recently between high-net-worth buyers -- who have been accumulating physical metal, and the smaller retail investor -- who has been mostly absent from the market in recent months.

And Philip points out how even though sell backs of gold have picked up, that has not been the case with silver -- and how the lack of liquidations have kept a floor under the silver price and may point to an upside move in the months ahead.

So be sure to stick around for a deep-dive into fundamentals of the global precious metals markets with Philip Newman of Metals Focus, coming up after this week’s market update.

As trading wraps up for the month of August, the gold market is set to record its highest-ever monthly closing price.

Gold defied expectations, in some circles, of a summer slump. The question seems to be how high the monetary metal will go heading into the fall. 

Metals markets will have the tailwind of a near-certain Federal Reserve rate cut next month. They may also start reflecting political fear and uncertainty as the November election draws nearer. The threat of a gathering economic storm precipitating a deleveraging event in the financial system also looms as a possibility.

For now, gold bulls are rightly feeling vindicated as spot prices currently come in at an impressive $2,514 per ounce. That reflects a slight loss now of 0.3% in this week’s trading.

Turning to silver, spot prices are down 2.9% this week to trade at $29.16 an ounce. Platinum is pulling back 3.5% to trade at $942. And finally, palladium is putting in a weekly gain of 0.8% to command $1,002 per ounce as of this Friday morning recording.

The white metals have been lagging behind gold throughout the summer. Frankly, they’ve been underperforming gold for years -- and in the big picture, for decades. 

A major reason why gold is outshining other metals is that it is being accumulated by central banks around the world, led by Russia, China, and others.

The People’s Bank of China reportedly paused its gold purchases earlier this year. At least one keen observer discovered it is nevertheless continuing to accumulate gold without publicly disclosing it. 

Data shows large imports continuing to go through the Shanghai Gold Exchange. Whether it’s central bank buying, other institutional orders, or purchases by individual Chinese consumers, China’s appetite for gold remains robust. 

Despite gold hitting record highs and commanding some attention in the mainstream financial media, investor demand has yet to really take off. Net assets in exchange-traded funds that track gold prices have barely budged. And buying of retail bullion products has been anything but manic so far this year.

As a result, inventories of coins, rounds, and bars are plentiful, while premiums on popular products remain low at low-cost dealers like Money Metals.

The fact that investor sentiment toward gold remains lukewarm at best suggests that there is still a lot of room for the market to grow to the upside – both in terms of public participation and spot prices.

But of course, the biggest upside potential can be found in the metals that are currently the most undervalued. 

Even at roughly $30 per ounce, silver remains well below its previous all-time high near the $50 level. That’s despite the fact that it is seeing rapidly growing sources of industrial demand in photovoltaics and electric vehicles. 

Meanwhile, mining supply isn’t growing at all – setting up the prospect of large supply deficits in physical silver. In 2023, the silver market posted a structural deficit of 184 million ounces. That deficit is projected to reach 215 million ounces this year. 

For more on the supply shortfall situation in silver, make sure to catch our upcoming interview with Philip Newman here in a moment.

Rising silver prices will, in theory, incentivize more production. But the costs of extraction are also rising. And the costs in terms of dollars and time of developing new mines is prohibitive. 

S&P Global estimates that it takes an average of 20.8 years worldwide to develop a new gold mine. The time-frame is even longer in the United States. It’s also longer for copper, nickel, and other base metals – which often produce silver as a byproduct.

There are few primary silver mines in existence. And since most mined silver is immediately consumed by industry rather than held by central banks or individual investors, above-ground scarcity can quickly turn into a panic-inducing shortage.

When the silver futures market does finally adjust to the reality of a chronic supply deficit, we could see a price spike to new records, and beyond, that makes the magnitude of gold’s current bull run look modest by comparison. 

Well now, without further delay, let’s get right to this week’s exclusive interview.

Mike Maharrey: Greetings. I'm Mike Maharrey, a reporter and analyst here at Money Metals, and I'm here today with Philip Newman. He's the managing director at Metals Focus, a fantastic outfit that does a lot of analysis and gives us a lot of data in the precious metals markets. How are you doing today?

Philip Newman: Very, very good and thanks for having me on. Much appreciated.

Mike Maharrey: Well, I really appreciate you coming on and spending a little bit of time to chat about precious metals and interested to get some of your insight on things. But first, I would really like for you just to give us an overview of what you guys do at Metals Focus.

Philip Newman: Sure. Well, as you mentioned, I'm one of the managing directors. There are three of us that own the company. In total as a team of about 30 of us in eight markets around the world. And our job, I guess, is pretty straightforward, it's to provide independent market intelligence on all of the major precious metals. And we really do that by getting out into the market and that's why we've got people really spread around, because we spend a lot of our time on the road meeting companies across the supply chains globally.

And as you would know, most of the trade is privately owned, so you've got to gain their trust and to really lift the lid on what's happening in the market, really find out what's going on. So we have all these confidential meetings and we bring that back, and that goes out into a variety of reports. We do work for the Silver Institute. We produce their World Silver Survey for the World Gold Council. They have a quarterly report, Gold Demand Trends. We produce the data for that.

They write it, but we produce the data. And then there's an entity called the World Platinum Investment Council, and they have a whole range of reports that they produce, but once a quarter we pull together the data and the content for their Platinum Quarterly. And there's a whole range of other reports that we do a Gold Focus annually, short and long term forecasts and mine cost services. It's really across the gamut for the market.

Mike Maharrey: Yeah, it's really a lot of fantastic information that you can really delve into and get a lot of perspectives on. I think the first place that I ran across you guys was through the Silver Institute a number of years ago. A lot of those reports are really solid. So I want to pick your brain since you're immersed in this kind of data and get maybe some of your thoughts on what's going on in the markets.

I want to start with silver, and we've seen that there has been a pretty significant market deficit for the last couple of years. More silver being used than what's being produced and recycled. I was wondering if you had any insight on what's driving that shortfall right now?

Philip Newman: Sure. Well, I think what you've seen on the supply side, first of all, is a market where you've got broad stability if you bring together mine production and recycling, as you said. And you contrast that with these gains that we've seen on the demand side of the market, and that's come from a few areas, most important has been on the industrial side of the market where we've been hitting successive highs.
Just to throw a couple of figures out, just back in 2020, so I guess during COVID, you were using half a billion ounces of silver because a whole range of industrial applications. And you fast-forward to last year and we were just over 650 million ounces. That's an incredible rise. And this year we could be over 700. So I think that's been one of the leading areas of why we've had this massive deficit.

We've also had growth in the silverware and jewelry market. The bar and coin has done exceptionally well. Much weaker now, and maybe we'll get into that a little bit later, but that was going really great guns through to last year. So really a whole range of areas that have helped global demand just outpaced global supply. And as you said, that's resulted in these really eye-watering deficits.

Mike Maharrey: Have you seen a lot of this industrial pickup in the green energy movement with solar panel production and maybe EVs and stuff like that? Is that one of the big factors that's driving this?

Philip Newman: Very much so, especially on the solar part of the market. There, you've seen demand really hitting record highs, its successive highs, as you've had more countries really join that party, installing new capacity. It's been driven heavily by China, which accounts about half of global new capacity, but you've also had other countries really coming up and really stepping up as well.

So I think that's been one of the really important areas in terms of the green economy. You also mentioned about electric vehicles. That's been really interesting. Because yes, you've had growth there, but equally, the growth, especially I think this year and maybe last as well, has certainly been slower than was initially forecast. I think you're expecting good things going much further out, but I think that the growth has certainly been slower.

And I think some of the OEMs have perhaps put a bit more emphasis, at least for the short term, for example, on hybrid vehicles. But all of these use silver. Now, you've got more silver in say EV than the hybrids, but just because you're moving say more towards from EVs to hybrids, this is still overall a positive story from a silver perspective.

Mike Maharrey: Right. So when you hear this term market deficit, obviously they're getting the silver from somewhere. Where is this deficit made up and how long is it, in your view, sustainable to keep going with these deficits before it becomes really problematic on a true supply side?

Philip Newman: Sure. Well, I think, first of all, the deficit was a record level in 2022. It's around I think 260 or so million ounces. And I think I just don't see that being eclipsed. I guess that's the first point. But even allowing for that, we still think the deficit is going to be pretty aggressive for last year around the 190. Maybe we would eclipse that this year. We shall see. So in terms of the sources, where that comes from, there are quite a few that we can look at.

I guess the most straightforward are what we call identifiable silver stocks. So that's holdings of large bars that we can pinpoint where the data is transparent. So for example, you have the LBMA in London, they report vault holdings that we see. You also then have the likes of the CME in New York, and then identifiable stocks are elsewhere. You have pretty decent holdings in the likes of China in two locations on the Shanghai Gold Exchange and the Shanghai Futures Exchange.

So those are the four big hitters. So some of that we've seen depleted at that times in recent years. Then it gets a bit more opaque. So we start looking at large bar holdings where it's not reported. For example, in Zurich, in Switzerland, there can be quite sizable holdings there. We also have to think about other jurisdictions. For example, are there stocks outside of the CME in the US, in East Asia, maybe in the likes of Singapore?

So I think there are a range of locations that we can think about in terms of large bars. Once you move beyond the large bars, then we've got to think about other stores of metal as well. I guess if I could, just before we come to that, going back to London, we've also got to think about the ETFs. Now, that's obviously part of the holdings that the LBMA report and those holdings and the ETFs tend to be pretty sticky.

Yes, we've had some liquidations recently, but those liquidations have been pretty modest. Just because silver picks up to say $30 doesn't mean you're suddenly going to have investors liquidating those holdings. So that's the other thing we've got to think about, not only where the silver is held, we've got to think about the form and who's holding it, what is their attitudes to their holdings.

So for example, going back to Zurich, you may have large holdings there, but maybe it's held by high net worth investors, by family offices with a long-term view of holding it. So maybe they're not about to liquidate it. So then we've got to think about other metals. And for example, in the US, you've got very sizable holdings of coin and bar, but those investors have been pretty reticent about liquidating their holdings.

This year you've seen pretty decent liquidations of gold by recent investors, but I don't think of those holding silver, I think what they sold back has been pretty modest. So that's been really interesting. Then in India where you've got, again, very large holdings of investment bars, it's one of the largest retail investors in the world, maybe the largest this year given the weakness in other locations, and we can add into that their jewelry and their flatware, because they buy them in a pretty low margin.

And so that's what we call near market silver. And so when the price in rupee terms picks up significantly, that could be liquidated and sold back. And when that happens, maybe you don't have to ship silver into India. And so that can take pressure off of holdings elsewhere. Or maybe if the liquidations are so great, maybe that silver would come out and flow into refineries outside of India to be refined.

So you do have a lot of places where we can look to have silver being liquidated. So to your other question, how sustainable is this, I think ultimately, you will have to have the price bid up to encourage these investors or these holders in all these different locations holding silver in different forms to ultimately liquidate that, to really balance the market. And that's I think what makes it really so fascinating to try and figure all of this out.

Mike Maharrey: It's interesting as you're talking because I think here in the United States we tend to be a rather myopic group and we forget that this is a global market. It's not just what's happening here in the United States. It's China. It's India. It's Europe. It's all around the world. And I think a lot of people maybe not forget that, but I don't know. Like I said, we're myopic here in the US.

It's interesting looking at the dynamics between gold and silver right now. Because as you mentioned, we've seen a really healthy price surge in gold. We've seen some record levels. And silver's not done bad, but it's certainly not had the bull run that gold has had. And the gold-silver ratio, the last time I looked at, it was still in the 84-85 range.

What do you think is holding back the silver market right now in terms of playing catch with gold, and what do you think what's going to take to start to see that ratio start to maybe spread a little bit smaller?

Philip Newman: Sure. I mean, you're absolutely right in terms of the challenges about the ratio, and it's nothing new to what we've seen. It's been around that level on average for quite some time. On a quarterly basis, it last averaged below 80 all the way back in Q1 2022. So quite some time ago. And even in late '23 and early '24, it was averaging 85 and 89. That's a pretty quite heavy ratio.

I think at that time, if I can start with that briefly, because silver, as you know better than anyone, it behaves as a precious metal and at times as an industrial. Not that it's a straight line. It's not like day one is precious and day two it's industrial. It is certainly not that linear, but want of a better phrase. And what we saw at times last year and especially early this year is that the...

I guess there were a couple of things. Firstly, gold was getting a very decent bid from expectations about the Fed and how dovish it may be. And what you also saw from a silver point of view is that concerns about China, the Chinese economy, especially led by what's happening in the property sector and the crisis that was happening there, that was weighing on industrial metals, and that really drags silver.

And I think it became a little bit, if I could say, of a vicious circle that investors were seeing the upside that gold was getting from these macro factors and they were thinking, well, if this can't generate upside for silver, what can? Unfortunately, you saw some institutional investors either just focusing on gold or maybe they were going long gold, short silver, but it was weighing on silver.

As I said, it became a little bit of a vicious circle. And I think where we are now, again, gold is obviously getting most of the tailwinds from the expected rate cut in a few weeks time. Plus, we have the macro uncertainty that's playing out obviously in terms of what's the uncertainty, what's going to happen between Iran and Israel. Yes, it could remain tit-for-tat, but what happens if, unfortunately, one of those goes wrong?

There's a lot of uncertainty there as well. And I think institutional investors that are certainly watching that. And I think when you look at the health in the equities, I think for some investors that hold gold, as equities has done well, they've gone out and been buying more gold as well. So I think that these are some of the things that we've seen in the market.

I think also, although overall industrial demand as we touched on I think remains very healthy, the coin and bar market for silver is really struggling. Gold as well, but the challenge for silver is that you've got fewer really big markets that consume coin and bar. You've really got the likes of India, the US, Germany, and Australia, those are the big heavyweights.

And Switzerland to some extent, but those are your four really big gorillas in the room. And at the moment, unfortunately... I mean, these markets have had an incredible run. And sometimes I think especially as an analyst, we say, "Oh gosh, this year's really tough," and it is, but an incredible run over the past few years. So just trying to put that into that perspective.

Although the liquidations by retail investors are pretty low, the buying investors in the likes of the US and Germany I think are really struggling. That I think is also taking away a little bit of support from the price, not drastically, but I think a little bit. So I think those are some of the factors that we are seeing. And again, I guess we scratch our head a little bit because again, we've got the market really very sizable deficit for this year.

And I think that's the other point, if I can say, Mike, that investors, maybe they look at our figures and I hope they do, but they hear about a deficit in the market these past few years, and again, they think, well, why isn't the price responding to that? So I think that deficit is a long-term positive. It can actually count against the price, if you see what I mean. Investors go, well, the deficit is sizable, why isn't the price reacting? And again, maybe it discourages them from looking at the price or investing in silver at least in the short term.

Mike Maharrey: Yeah, that makes a lot of sense. I do my own podcast as well that comes out middle of the week, and I actually talked about this past week the fact that just because of the way the media cycle is in modern times, everything is... We used to talk about the 24 hour news cycle. Now it's about the 30 minute news cycle. You're reacting to whatever you just saw on X or whatever social media platform. And so I do think a lot of times those more longer-term things are lost on people. I remember not too terribly long ago buying silver for like eight or $9 an ounce. That's not a bad deal right there.

I want to talk a little bit about gold, and we've mentioned that to some degree, but I've seen a lot of anecdotal evidence, and I'm curious as to whether the data that you've seen backs this up, that really a lot of the gold demand has been driven from the East, so Asia and the Middle East, and that Western investors are still, to some degree, on the sideline or at least have been. Does that dovetail with what you've seen in your data?

Philip Newman: I would say to some extent. So from an Eastern point of view, and if you break it down by some of the market segments, you've had very decent coin and bar demand in the likes of China and to some extent India as well. More recently India, but over the first half, China was very strong, very decent premiums. Now the market has gone to a discount. But over much of the first half, very strong demand there from retail investors buying into the price upside.

Briefly just for India, what's been really interesting, very short-term, but really fascinating is as you may have seen, they cut their import duties a few weeks ago, late July it was announced, and that was across all precious metals. And that was unexpected, both in terms of the cut, but just the scale of the cut. Really, really unprecedented. And that gave a shot in the arm to the gold market. And so normally, consumers there don't really look at what the duty is.

They're paying the landed price, which is the spot price, the import duty, other taxes, all sorts of things. But with the cut in duty was so great, they've gotten so much coverage that really people flocked to the shops. They started buying heavier pieces. Even though the gold price, because in dollar terms it got up recently, that had, what's the word, taken out most of the benefit of the duty cut, if you see what I mean.
But in their minds, they were still benefiting from the duty cut, and so they haven't backed off because the price pickup is really amazing. And so that's been one where to a point South Asia has been really interesting and some good figures there very recently. Going to other market segments for the official sector, the first quarter was incredibly strong, although it backed off in Q2, so April to June.

The first half was a record total for the figures that we produce on a net basis globally. Now, China was the largest purchaser in the first half. So others were certainly there, but China was the largest one, to your point about Asian buying. So it has been really fascinating. I think the Middle East has been a lot more mixed. I think where we see buying there has been much more opaque, much more difficult to measure.

There's been elements of high net worth buying. Now, whether that's been some local Middle East or whether that's a family office in Dubai that is executing a trade for a metal account in Zurich is hard to say. But when we are on the ground and speaking to people, that's part of the sense that we get. I think for the Western markets, I mentioned that the US for gold bar and coin has been...

I'd say it's been mixed, because what you've seen there, Mike, is a lot of liquidations, but dealers are able to turn that around and sell it to other investors, so some booking profits and say some coming in thinking there's more upside. So what that means is on a net basis, the figures look pretty weak that we put together. But on a gross basis, the markets are a little bit healthier, if that makes sense to you.

But what that also means is that if you're say a refiner making small bars, say one ounce bars to the States, or a mint that's supplying one ounce or fractionals in, it's a really tough time and their figures have been pretty weak for much of this year. And the same thing for the likes of Germany as well and much of Europe, unfortunately, really, really struggling.

Where it's been interesting though on the Western point of view, there's a couple of things. Firstly, there's been some high net worth demand in the likes of the US, say family offices wanting to buy in store physical in the US. So you've seen some of that come out this year. So really a big old contrast to what the retail investors are doing as a group. And the other one is on, I guess, more of a speculative side.

When you look at the CME and you look at the data that the CFTC publishes, you've seen some pretty decent positions. And I think on a net basis, if you look at the... We tend to focus on the managed money ones. And if you just do a very crude calculation and you just take the latest net long, which is just over 600 million ounces, and you multiply that by the spot price for that day, in value terms, the net managed money is a record high.

Because sometimes, unfortunately, for better or worse, I've been an analyst all my life and I tend to get fixated on ounces, the volume point of view. But of course, if you are an investor, you're spending dollars. If you're a consumer, you're spending rupees or euros. You're not often going into shops saying, "I want X grams." You've got a budget.

But for investors, they're looking at the value of their portfolio, and so their exposure on a net basis is a record high, which is just based on the latest data. The CFTC data goes back I think quite a long time. So I think it's a representative time period. So on that standpoint, it's really quite... The investment that we've seen therefore or the commitment in the gold market I think has been fairly broad-based, if I can say.

Mike Maharrey: That's really interesting when you look at it from those different perspectives, because we do tend to get locked into our own paradigms, I guess, for lack of a better word. So I'm going to get you out on this one. Is there something that you've seen, and this can be either in the gold market or the silver market or even if you want to get into platinum, is there something that you've noticed in the data that you think a lot of people are missing?

Philip Newman: Wow!

Mike Maharrey: And no is a fair answer to that question because I know I just threw that out there.

Philip Newman: Yeah, no. Well, it's not going to come through in the data just yet. I mean, on a very, very micro level, as I said, it's the fact that people are buying heavier pieces in India and how the sentiment works I think has been really, really fascinating. I think on the supply side, what's been really interesting is there has been not a huge response from scrap to these gold prices.

Yes, there's been some, there's no doubt about it, but I think that has been quite modest, and that's something that we spend some time trying to work out why that is. If you go back 10, 15 years in the global financial crisis, for the jewelers in the US, when demand collapsed, it was the setting back that saved a lot of them. And a lot of the, I guess, loosely held pieces, broken jewelry and whatever else was really depleted and sold back at that time.

I mean, I think I'd be interesting to go down 47th Street in New York this week. I know that, again, back in those days, huge queues. You couldn't walk down. When I was there... When was I last there? I was there in April in New York. It's the guys who own the shops or their staff are coming out trying to entice you in. It's such a contrast. It'd be interesting to see if that dynamic has changed.

I know in some markets what's really interesting is that consumers aren't analysts. They're not looking at year-on-year or quarter-on-quarter prices. Their expectations at the price adjusts so quickly. So we as a research house, and again, it doesn't always come through in the data, but we're trying to understand how fast they move, how fast they adjust. Because what you can see, Mike, is that gold goes to 2,500 and there's a burst of selling back.

But then gold holds the 2,500 and it stops, even though it's a record price. And then maybe they're waiting now for gold to go to 2, 550 or whatever it is. Or maybe when gold falls to 2,450, they start selling thinking, oh goodness, that bull market is over. So the dynamics, consumers are, well, to me as an analyst, sometimes irrational, but how they behave I think is also exceptionally rational, how it's not a straight line. So that I think doesn't always come through so clearly in the data.

I think the other point is on the silver side, and it's something that we try to communicate. It's on the solar. Now, we talk about the fact that you've got these record levels of demand, and that's absolutely true. But what's really interesting is the speed with which the technology changes that analysts use and how that impacts silver, because the new technologies we get coming out tend to use a lot more silver than the other ones.

But at the same time, they are continually thrifting on the silver they use. Maybe they're planning to use thinner fingers on the panel, or they try to have a bigger gap between your fingers, whatever it may be. But in spite of that, there is still these record totals. It's a bit like a swan on the surface of a pond. It's not going anywhere, but its legs are going dime a dozen under the surface of the water.

So that's a really interesting one. And I think related to that, when you've got a price at around the $30 that we have, it's... And this is why we have people in the market that... Our head of PV of solo is based in Taiwan, and he's always on the mainland speaking to the powder and paste and the panel manufacturers. What are they doing? What do they think of the price of silver? And when you're at these levels, that creates a bit more pressure on their margins.

It really focuses the mind. And so sometimes that can lead to a little bit more thrifting in the marketplace. But even so, and we see that thrifting continue, but you still have these deficits in the marketplace. So it's really fascinating for us, and it doesn't always get, I think, reported that widely. And I don't think it's a negative in the marketplace because I think the demand is still very healthy and the market I think overall is in a very healthy position.

Mike Maharrey: The psychology stuff is really fascinating to me. I think it's hard to quantify, and so it's hard to report on that. But it is interesting the way... We might look at somebody and say, "Well, that's not rational," but it's rational to them. It goes back to the old Mises and some of the Austrian economists that value is subjective and who am I to say that the way somebody else values something is wrong, right?

Philip Newman: Absolutely.

Mike Maharrey: So before we get off of here, let me give you the opportunity to let people know where they can follow the work that you guys are doing and tap into that data.

Philip Newman: Sure. Quite straightforward, if you just go to metalsfocus.com, you'll see a range of reports that we do. You'll see contact details. We're happy to send out samples or put you in touch with one of the analysts or the sales team. So please do reach out. Happy to help.

Mike Maharrey: Yeah, absolutely. Well, thank you so much again for taking a little bit of time out of your day. Really interesting insights. I really appreciate the depth of analysis that you offered. I learned a lot, so I appreciate that. And I hope you enjoy the rest of your, I guess, evening where you are.

Philip Newman: Absolutely. Well, thanks for having me on. It's been really a lot of fun to talk to you and really debate these issues.

Mike Maharrey: Thank you.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. And remember to tune in as well to the Money Metals Midweek Memo, hosted by Mike Maharrey. Just go to MoneyMetals.com/podcasts or find that on whatever podcast platform you prefer.

Until next time, this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a wonderful Labor Day weekend everybody.