Bullion banks and central banks are supporting the gold price

Izabella Kaminska at FTAlphaville has made an interesting point about the languishing gold price.

She notes that even though central banks have been net buyers of gold, the price is still softening.

Data confirms that bullion banks and central banks have been absorbing gold in ever larger quantities.

And unless central banks keep the buying up, a bear market could take hold. Central bank buying is a relatively rare thing, and their chart below shows this.

It is also instructive about how soft the jewellery and EFT markets have become.

Unless the bar and coin investors grow their demand fast, the soft parts of demand for gold will overwhelm them.

It has the hallmarks of the professionals exiting - profitably - as the retail investors dive in and stockpile (recently supported by central bank activity).

And all at a time when the price has stopped rising.

That we suggest, may be down to gold price expectations finally having turned. Spot prices are, after all, most easily influenced by means of vaulting and stockpiling if and when today’s oversupply reality is offset by expectations of undersupply (or scarcity) tomorrow.

In the absence of increased scarcity expectations tomorrow,  it takes ever more hoarding today to keep prices from falling from their current level. Especially in the event that coin purchases have to be replaced as well.

The recent plateauing of the gold price thus either suggest that today’s spot supply is increasingly catering to tomorrow’s demand expectations, or in the context of more gold being produced all the time, it is taking ever more buying by the official sector to keep prices from falling.

It is hard to see how this can turn out well for new retail investors, even in the intermediate term.