Invisible Central Bank Gold Buying
What do you make of the past week's GLD ETF's 1.4 million ounce holdings gain?
Starting on February 18, 2025 the GLD ETF went on a gold ounce accumulation streak like we have not seen in a long time. It's still too early to declare that retail investors are starting to turn their attention to gold away from cryptocurrencies which have hit an air pocket during the past week. The strength in gold over the past year has had little to do with conventional gold bug enthusiasm, which is also why the resource juniors continue to be an ignored market. The gold uptrend is driven by the notion of gold as a bridge away from America, the theme of my talk at the upcoming Toronto Metals Investor Forum on February 28 and March 1, following which I will attend the PDAC conference March 2-4.
Over six days as of February 25, the GLD ETF had gained 1,430,000 ounces gold without a loss day, bringing its holdings to 29.2 million ounces for a gain so far this year of 1,135,105 ounces. On Friday the 664,000 ounce gain was the biggest since three years ago when Russia invaded Ukraine, or, as Putin Poodles would have us believe, Ukraine's elected "dictator" attacked Russia. Tuesday's gain was only 9,225 ounces, though still impressive given that despite gold being up a few dollars overnight in London, it was down sharply during a day when cryptocurrencies continued to reverberate from Friday's revelation that North Korean hackers had allegedly lifted $1.5 billion worth of coin from accounts managed by ByBit, a rival of Coinbase.
The crypto sector was celebrating the SEC's capitulation on trying to establish that cryptocurrencies are securities and exchanges allowing clients to trade them must register with the SEC and follow its rules. I tend to agree that this was the right decision, because securities represent ownership in a enterprise that might create new fundamental wealth, whereas cryptocurrencies are nothing more than wealth transfer vehicles that initially prey on greedy and stupid people but eventually prey on widows, orphans, and, if Wall Street has its way, retirees. It is important to keep these two creatures separate.
The crypto sell-off also comes in the wake of news that Argentina's president, Javier Milei, who, perhaps drunk on too much koolaid served up by his American libertarian bros, helped impoverish fellow Argentines through his pump of $LIBRA which gave existing owners a chance to swap turds for cash. Bitcoin itself is struggling to keep from falling through a level that represents the market's upside celebration of Trump's election victory in November. If bitcoin falls off this cliff it will signal the end of the Trump honeymoon.
The GLD ETF's current gold holdings are still 33% below the peak of 43.5 million ounces achieved on December 7, 2012 when gold was at $1,702, just before gold crashed in 2013. People tend to forget that from April 2011 gold spent 3 years above $1,500 before crashing below that mark on April 15, 2013, eventually bottoming at $1,055 in December 2015 when the GLD holdings also bottomed at 20.3 million ounces. Gold equities, however, had already developed downtrends by early 2011 as you can see in a long term chart for Agnico-Eagle Gold Mines Ltd which peaked in December 2010 and only gave gold a brief nod when it peaked at $1,895 on September 6, 2011. Gold broke back above $1,500 in mid 2016, surpassing $2,000 for the first time in 2020 during the eruption of the covid pandemic, but the tracked sideways in a range of $1,800-$2,000 before breaking out in 2024 during which it gained 26%. If you look at the Agnico-Eagle and gold price charts hovering near recent record high prices, how can one be anything but fearful of a sharp reversal? That is why after a year of random daily changes that kept the GLD ETF gold holdings flat this sudden accumulation streak is so strange. Why only now?
To understand why this daily holdings change chart is worth keeping a close eye on it is important to understand how physical gold ETFs such as GLD work. The GLD ETF has an arbitrage mechanism designed to keep the trading price of GLD close to the price of physical gold. The problem with publicly traded closed end gold funds, namely ones which used the IPO money to buy a pot of gold which it simply owns, is that they can trade at a premium or discount to the intrinsic value of the gold holdings. This can happen when the investing public becomes overly optimistic or pessimistic about the prospects for gold. That makes these funds unattractive as investment vehicles for investors who want constant liquidity at fair market value.
The GLD was designed in 2005 by the World Gold Council with the help of people like Pierre Lassonde. The goal was to promote ownership of gold as a liquid investment for a broader range of investors not interested in the headache of storage costs. The GLD has an arbitrage mechanism which allows designated parties with access to the bullion gold market to short the GLD when its price is higher than the bullion price, buy the cheaper physical gold in the bullion market, and deliver it to the ETF which will issue new GLD shares in exchange for the physical gold. This allows these designated traders to close out a short position and collect the arbitrage profit while keeping the GLD ETF from running ahead of its intrinsic value.
The reverse happens when GLD starts trading at a discount to the physical market when investors panic. The designated traders buy the discounted GLD shares and sell an offsetting physical gold position in the bullion market. They unwind this short position by delivering the GLD shares to the ETF in exchange for physical gold to deliver to their bullion market short position. This keeps the price of the GLD ETF from dropping much below its intrinsic bullion price based value. One cannot argue that the GLD ETF sets the market price because the current holdings represent only 0.4% of the 6.7 billion ounce above ground gold stock, though the actual amount in gold ETFs is somewhat higher because there are a number of competing ETFs similar to GLD. However, the liquidity of these exchange traded physical gold backed securities does create the potential for massive inflows if the non-MAGA half of Americans which has historically shunned gold as a "barbarous relic" begins to see gold ownership as the ultimate form of protest.
I track the daily changes in the GLD ETF holdings as a way to monitor general investor sentiment toward gold. When retail investors are bullish toward gold their net buying of the GLD makes it trade at a premium which the designated traders short into, as a result of which the ETF gains gold ounces. When they are negative the GLD ETF loses ounces which end up back in the hands of parties who prefer to hold bullion and who definitely do not qualify as retail investors. When retail is indifferent towards gold the holdings undergo little change, and that has been the pattern since the low of February 2024 when gold began its sustained drive to a recent peak at $2,937. The past week's surge thus tempts one to ask if a shift is underway.
The GLD ETF was an innovation when it came out and was instantly condemned by gold bugs such as the GATA crowd headed by Bill Murphy. These were largely right wing ideologues who did not see gold as a common sense hedge against geopolitical uncertainty and Weimar Germany or contemporary Zimbabwe style fiat currency debasement. They saw it as a symbolic weapon against "liberalism" which they conflated with "socialism" rather than the radical democracy agenda of America's founders. Emotion rather than pragmatism encouraged them to spread lies that the gold was not really there in the GLD ETF.
This animosity towards the GLD ETF did not make much sense because the World Gold Council is a lobby group for gold producers which last year produced 106 million ounces with a nominal value of $254 billion at the average price of $2,389 for 2024. They weren't interested in conspiracy theories about gold being manipulated by the Federal Reserve to hide the pernicious consequence of fiat currency debasement caused by expanding the federal debt to fund the military-industrial complex and the health and welfare of retirees and the lower end of the economic spectrum. The WGC's real world problem was to find a home for this newly mined gold which was not of much practical value in the realm of industrial usage, unlike silver, most of whose above ground stock is fabricated into something useful. The producers needed buyers beyond the jewelry sector to prevent the price of gold from crashing below the cost of production. The visibility and ease of trading that the GLD ETF created also helped promote the idea that physical gold ownership is not just the playground of grumpy old white men. I remember at a PDAC dinner asking Lassonde about this gold bug hostility toward the GLD ETF and he just shook his head sadly.
To create some context for this problem the WGC was trying to tackle, consider that since 1980, when gold stabilized at around $400 plus or minus $50 where it spent the next two decades while gold bugs brayed about imminent $2,000 gold, the mining sector has produced 3.5 billion ounces, more than doubling the above ground gold stock to 6.7 billion ounces which at the $2,900 price have a value of $20 trillion.
A major problem that emerged for gold after it was made a freely traded asset class is that official sector ownership of gold had peaked at 49% of the total gold stock in 1959, and by 1965 had begun a decline in total ounces held that did not reverse until 2009 after the financial crisis created by Wall Street. US official gold holdings peaked at 75.7% of the above ground gold stock in 1940, but peaked absolutely at 664 million ounces in 1952.
During the mid 20th century South Africa's Witwatersrand Basin was the dominant supplier of gold. Over 2 billion ounces were mined from the thin high grade reefs that dip into the basin, and about 1 billion ounces remain at depths which are too hot and dangerous for humans to mine. My gold supply evolution graph shows how South Africa dominated gold production until a long term decline began in the 1970s. The United States was pinching out as a gold producer but came back in the 1980s thanks to Nevada's Carlin-type gold discoveries. During the past decade America has begun to fade again as a gold producer, while Australia and Canada among Global West nations have expanded, though the big gainers have been Global East members China and Russia.
The decline in official sector gold holdings has its roots in the decision by the United States to peg the price of an ounce of gold at $35, and make physical gold exchangeable for US dollars on that basis. This became a huge problem for gold producers as post-war inflation began to accumulate. Producers such as Homestake, America's biggest and most profitable gold mine, did enormously well during the 1930s Depression because costs declined while the government bought all mined gold at the fixed price of $35 per ounce. By the 1960s producers wanted the US government to reprice gold upwards, as it did from $20.67 per ounce to $35 in 1934 after FDR forced Americans to turn in their gold for dollars at the old "exchange rate". It is hard to imagine today but it became illegal for American citizens to own physical gold, though I say that with some hesitation in light of the unimaginable polices enacted so far by the second Trump administration.
Homestake, which wanted a dramatic repricing of gold to a much higher level, the continuing dream of those who push for a "gold standard", did not quite get what it wanted. The rest of the world, recognizing the rising cost of gold production, which was due to inflation not grade depletion, launched a run on American gold that drained 373 million ounces from Fort Knox until 1972 when President Nixon closed the conversion window and allowed gold to be priced by the market. The 1970s was a period of uncertainty, but gold's new role as an independent asset class not subject to government control exploded in 1979 when the Soviets invaded Afghanistan and Islamic fundamentalists tossed the American shah puppet out of Iran.
The United States did not sell much more gold after 1972 when it had about 261.5 million ounces left, half of it supposedly stored at Fort Knox which the new Treasury Secretary Scott Bessent recently confirmed is still there (to be a proper gold bug you are required to embrace the conspiracy theory that the United States secretly sold all its gold). Many central banks, including those of Canada and the United Kingdom, went on a selling spree during the 1990s that did not stop until the 2008 financial crisis. Since 2009 central banks have been net buyers, accumulating 197 million ounces of the 1.6 billion produced since then. The lesson learned from 2008 seems to have been that "in America we must not trust", with many central banks embracing this idea well before Donald Trump gave it much greater self-evident legitimacy. But was an acceleration of central bank accumulation of gold really driving the price of gold during the past year?
Gold had a rally in the second half of 2020 when countries such as the United States pulled all stops to deal with the covid pandemic. The "fiat currency debasement" crowd was out in full force, but caved in the face of the crypto boom in 2021 after the failed attempt by Trump to steal the election. Gold's strength since Ukraine's "act of aggression" against Russia, which forged a pinky finger alliance with Xi JinPing's China to help it cope with the humiliation inflicted on Putin's military by the Jewish "Dictator" Zelensky and his "Nazi" troops, has been attributed to central bank buying. It certainly is not attributable to retail "gold bug" investor interest or the GLD ETF holdings chart would look like it did in 2020. What surprised me is that the "official sector" facts as published by the World Gold Council do not support the claim that central banks instead of gold bug hand wringers about fiat currency debasement are driving the uptrend in the price of gold.
When you look at the official sector holdings data published periodically by the World Gold Council, which gets it from the IMF, net central bank holdings have increased by only 20 million ounces since the start of 2022 and even declined modestly in 2022. At $2,900 that's an addition of $58 billion worth of gold in an asset class worth $20 trillion today. The US weaponization of the dollar's status as the world's sole reserve currency and its confiscation of some of Russia's reserves have given other nations, especially those from the Global East, good reason to buy physical gold as a reserve asset in place of the US dollar. But where is the evidence that this has been taking place on a large scale?
The evidence lies in gold's powerful uptrend since February 2024 amidst subdued sentiment among traditional gold bugs who have become enraptured by Donald Trump and his repudiation of pretty much everything the Republican Party once claimed it stood for. Those doomsday preppers who clean out Costco every time it gets a delivery of gold bars have not pushed the value of the gold asset class from $15 trillion to $20 trillion. Much deeper pockets are needed to create such a move, and because those deep pockets are not visible and their nature not generally understood, there is fear that gold's uptrend will soon enough reverse.
Trump's recent bluster about how he will punish any nation that attempts to shift away from reliance on the US dollar was probably anticipated by nations such as China, which used to convert its trade surplus with the United States into T-Bills that funded America's fiscal deficits. In recent years China's central bank holdings have declined, even though last year it had the biggest global trade surplus ever. Suspicions abound that in fact China is distributing its treasury bill holdings through the network of partly state owned entities it controls which serves two purposes. One it hides China's vulnerability to holding an asset class owed by its biggest rival for global hegemony, and two, it keeps its own citizens from wondering why their central bank keeps investing trade surpluses in an asset class its main rival has unlimited capacity to print more of and which it uses to keep old and poor people alive as well as the world's biggest military bankrolled.
Most Americans, and especially MAGAmericans, have probably never seen a pie chart breakdown of how the federal government spends its money. If they did they would be hunting down Emperor Musk and his DOGE jackals with pitchforks and torches. The small things Musk's DOGE jackals are destroying amount to penny wise pound foolish self-lacerations for America. To make the fiscal difference Trump has demanded, so as to allow a tax cut extension and even an expansion which moves the needle for nobody (too small to make much of a difference for the lower end of the economic spectrum, and in terms of quality of life enhancement, materially inconsequential for the upper end of the spectrum though offering a gain in the form of emotional currency boosting superiority), Musk needs to dig into the big categories.
These are called "social security" (aka retirees), "national defense" (aka the military-industrial complex - Putin is clearly trolling Trump when he urges that America and Russia both reduce their respective $900 billion and $100 billion military budgets by 50% while suggesting China join in if it were dumb enough to do so), "health" (aka Medicaid), "Medicare" (aka enabling retirees to draw social security as long as possible), "Income Security" (aka welfare and unemployment insurance) and "veterans" (aka the John McCain style "losers" who failed to invoke "bone spurs" to avoid suffering that ultimately needs and deserves support from the state). What Emperor Musk cannot do anything about is "Net Interest", a cost that will keep growing, not just because the fiscal deficit remains untamed, but also because the willingness of the rest of the world to bankroll America's fiscal deficits will shrivel as Trump pursues a strategy of alienating friend and foe alike except where he feels like being a Poodle.
But is China truly hiding a secret stash of T-Bills which to start unloading would be an act of self-harm? Trump likely knows this and may be prepared to call Xi JinPing's bluff. China may have seen the wisdom of hiding the vulnerability created by converting the success of its export oriented economy into ownership of US debt instruments. But what really stands out is the modest growth of the official sector gold of the world's second largest economy. What Trump probably does not know, and knowing which would really burn him up, is that China may own more gold than America.
Perhaps much more provocative to the United States than China owning way too much US debt which the United States can always repudiate in a cataclysmic showdown, as Trump has even publicly hinted he could do, reneging selectively on certain US debt, is the idea that China has been building a secret gold reserve. In 2000 when the China super cycle was just getting underway China's central bank holdings totaled 13 million ounces. Today it has grown to 73 million ounces which puts it in seventh place behind Russia and still a long way from America's 261.5 million ounces. The next largest holder is Germany with about 108 million ounces.
Since 2000 China has produced 253 million ounces gold and has been the largest gold producer for more than a decade. Of that amount its central bank has gained 48 million ounces, but that leaves 205 million ounces unaccounted for. China is the official buyer of domestic gold production so we know at one point China owns every ounce its country produces. Does it sell them to Chinese citizens so as to encourage distrust in the Chinese currency or promote un-communistic celebration of property through gold jewelry as Indians are so fond of doing? Or does China dump the gold into the London bullion market so that it can end up with more of those US dollars it struggles to re-invest in something other than T-Bills? The simplest explanation is that the Chinese government indirectly still controls all those domestically produced ounces which would boost its gold holdings to 278 million ounces, a bigger hoard than that of the United States.
The explanation that central banks are responsible for gold's powerful uptrend makes sense if there has been stealth central bank accumulation of gold over the past year or so. Such accumulation is for strategic purposes, to assist with bridging a major realignment of global trade relationships as the rest of the world figures out how to work around the world's biggest economy, whose long and complex supply chains that ring the planet could become severely disrupted by indiscriminate tariff polices. What if China not only controls all the gold it has produced during the past quarter century, but a lot more accumulated in the open market, especially during the past year? The market fear is that whoever bought all this gold will soon enough turn around and start taking profits. But if the buying has been for strategic long term reasons rather than profit, the gold price gains may prove much stickier than the market for resource juniors and gold producers seems to think.
America's gold is worth about $757 billion at $2,900. There has been speculation that Trump may want to sell America's gold in order to buy cryptocurrencies, foremost among with would be bitcoin. Perhaps this is what keeps former gold bugs turned Putin Poodle Party members from getting excited about the gold price. But there is a potential deal here, namely that China offers to swap $1 trillion worth of T-Bills for America's gold. What a deal, America swaps its for MAGABucks. The optics are so bad it will not happen, but if it did, the real price of gold would soar. But even if Trump started to secretly sell America's gold as the gold bugs always feared could happen or had happened, those who monitor the bullion market, such as central bankers, would notice, and we might see "mysterious" selling pressure in the T-Bill market that raises yields very visibly and painfully for most Americans. I think America's gold is going to stay where it is and not be converted into cryptocurrency holdings.