Good morning, and welcome back to IPEwithSBB! As I researched and wrote today’s post, I couldn’t escape the feeling that I was a character in a steampunk novel, a subgenre of science fiction in which outdated technologies of the Victorian age anchor and shape fantastical future and alternate worlds. The new global system emerging now likewise combines elements of the old and the futuristic, merging and reassembling remnants and echoes of bygone eras with new social and technological creations that until recently could only be found in works of science fiction.
“I turn away from him and step into the vastness of New Crobuzon, this towering edifice of architecture and history, this complexitude of money and slum, this profane steam-powered god,” wrote China Miéville in Perdido Street Station. Recent economic and financial news indicates that for us, here in the real world, the historical relic on which our future world centers is probably going to be gold, not steam.
(Image: Rendering of New Crobuzon, a city featured in the novel Perdido Street Station by China Miéville. Unfortunately, no artist is credited on Goodreads, but here’s the link).
Gold—which has been used as money since at least 550 BC when King Croesus of Lydia ordered coins struck and was worn in sheets as a facemask by Queen Cleopatra of Egypt who believed it had rejuvenating powers—was famously deemed a “barbarous relic” by British economist John Maynard Keynes in the 1920s, who thought the world had moved beyond the need for gold standards.
It seems that Keynes maybe got this one wrong, because over the past few years gold has been making a serious international comeback. (See also my post on gold from last year.) Recent market news has been absolutely wild. Gold prices reached historic highs in US dollar terms, over US$2300/oz on the London market this week (a record high). When I woke up this morning I saw that gold prices broke the US$2400 mark in overnight trading.
Not only has demand for gold in Asia continued to grow, including buying sprees by central banks (the PBOC added 160,000 troy ounces to its stocks in March, having accumulated 287 additional metric tons in the 14 months to January 2024) and by households, but there is also growing interest in the West as a second wave of inflation sets in, the US economy weakens, and geopolitical risks associated with the Middle East war multiply (even Costco is selling a lot of gold lately).
Especially interesting and important is the fact that price of gold set on exchanges in London and New York is lower over the past year or so than the price of gold in Shanghai, China. The World Gold Council reported in January that, “The Shanghai-London gold price premium rocketed during 2023. The premium reached an annual average of US$29/oz, or 1.5% – the highest in history.” (The Council’s data measures the spread between the benchmark price set in the Shanghai Gold Exchange and the LBMA benchmark price set in London, both of which are spot/physical markets).
The local gold premium in China today, observable on and off since at least 2022, stems from rising demand combined with import controls that limit the amount of foreign gold available for domestic purchase. The premium implies that, in theory, physical gold is leaving vaults in the West, seeking those higher prices, and moving eastward to satisfy massive and growing demand in Chinese and other Asian markets, though hard data to support this point has been difficult to locate so far. It is also geopolitically significant, reflecting well the shift from a US-dominated global economy to a more multipolar one in which China and other Asian economies are increasingly powerful.
Also fascinating is the fact that global investors appear, more and more, to be interested in physical gold (such as gold bars or jewelry) instead of paper gold (such as ETFs, futures, options, and the like). While the markets don’t appear to be in backwardation at the moment (which occurs when spot prices are higher than future prices, and is typically related to supply shortages), I wouldn’t be surprised to see this occur sometime soon, especially if the US experiences some kind of financial accident or if Iran-Israel tensions escalate further.
To this point, I saw some general confusion in some of the financial presses as to how it was possible for gold ETF demand to fall while the price of physical gold was rising. For example, an article this week in India’s Economic Times noted,
One thing that’s clear is also a head-scratcher: Investors haven’t been buying exchange-traded funds, one of the easiest ways to acquire gold. A steady stream of outflows from gold-backed ETFs suggests that a major cohort is missing out — or cashing out.
“This is one of the more bizarre phenomena that I’ve ever seen in the ETF space,” said Nate Geraci, president of the ETF Store. “What’s particularly interesting is that gold demand has been very strong in other channels such as central bank purchases and direct purchases by individual and private investors.
The preference for physical gold over paper gold seems like common sense to me: why should one trust the value of a piece of paper over the value of real gold in one’s personal possession? After all, gold is not difficult or expensive to store. And, most ETFs don’t afford the owner access to real gold (see, e.g., this FAQ on the GLD ETF from State Street and note how difficult it is to redeem one’s shares for real gold), while gold futures and options contracts are mere promises of future gold, promises traded in markets prone to speculation, volatility, price distortions, and herding behaviors. (Along these lines, this week Chinese regulators imposed transaction limits on gold futures trading to curtail speculative activity.)
Further, as Chinese state media aptly noted back in November with specific reference to the plight of the US economy and the US dollar, the current environment of risk and uncertainty only adds to the benefits of holding physicals (China and its allies and trade partners are de-dollarizing):
China's foreign exchange reserves dropped for the third consecutive month to $3.1 trillion in October. Meanwhile, its gold reserves during the month rose for the 12th consecutive month to 71.2 million ounces, data from the State Administration of Foreign Exchange (SAFE) showed on Tuesday.
The 12-month unbroken stretch of gold buying signals a potential shift in China's asset allocation, favoring gold over dollar assets. It's part of a general trend that global central banks prefer gold over dollar assets to hedge against risks from geopolitical conflicts and an irresponsible US monetary policy.
(Fun fact: According the World Gold Council, average rates of return on gold in 2023 were about 14%, while the US dollar index was down 2%.)
Moving on, and in true steampunk style, the news about Keynes’ barbarous relic appeared right alongside other headlines that seemed to be ripped from a future world. I found the juxtaposition rather jarring. “Russia, US hold talks about non-deployment of nuclear weapons in space”, read one from LBC International out of Lebanon, and “Washington directs NASA to create time zone for the moon” read another in the South China Morning Post. One of my favorites was from the Daily Mail: “Incredible map shows the places on the moon where US, China and Russia are racing to find 'infinite energy' or trillions of dollars in minerals by 2030.” The map appears below (no gold mines located so far):
(Image: “Nations are racing for the moon's south pole and 'dark side'”, from The Daily Mail, 3/30/2024, here).
Perhaps because it reminded me of parts of a sci-fi novel I just reread over spring break—Counting Heads by David Marusek in which all consumable items (including food) are manufactured from and recycled back into the same basic nano-material—I also obsessed a bit this week over the international news on lab-grown meat. Lab-grown meat, also called “cell-cultivated” meat, is an “emerging technique that, instead of slaughtering animals for consumption, grows meat in a lab using a small sample of animal cells”.
The Guardian reported this week on moves by Republican leaders in the US to ban lab-grown meat. “Cultured meat is not meat … it is made by man, real meat is made by God Himself … If you really want to try the nitrogen-based protein paste, go to California,” said Florida state legislator Dean Black. “The emergence of laboratory-grown meat, including the recent federal approval of lab-grown chicken meat as safe for human consumption, has sparked controversy and political debate,” added Mena FN (approval for lab-grown chicken happened last June).
ABC News in Australia reported this week that the Australian company Vow just released its first lab-grown animal products in Singapore, a parfait made from Japanese quail cells. And, last month, Korean researchers developed an experimental, lab-grown food they’re calling “beef rice”: “Scientists made the experimental food by covering traditional rice grains in fish gelatin and seeding them with skeletal muscle and fat stem cells which were then grown in the laboratory. After culturing the muscle, fat and gelatin-smothered rice for nine to 11 days, the grains contained meat and fat throughout, resulting in an end product the researchers believe could become a nutritious and flavorful food.”
Things I’m keeping an eye on:
1. Coffee and cocoa: Paralleling recent price increases in other commodities markets (gold, silver, oil), coffee and cocoa prices have reached record highs in recent weeks as supplies tighten. Coffee prices are rising as “inventories dwindle and production is forecast to decline” (drought, El Nino, and farmers switching to other crops are negatively influencing production levels). Cocoa prices, which have more than doubled on futures exchanges since the beginning of the year, are rising on the back of production problems in Ghana and the Ivory Coast, which produce around 60% of the global cocoa supply: “More than 20 farmers, experts and industry insiders told Reuters that a perfect storm of rampant illegal gold mining, climate change, sector mismanagement, and rapidly spreading disease is to blame.” The swollen shoot virus has infected 590,000 hectares of cocoa plantations in Ghana alone (about 1.4 million hectares are planted to cocoa in Ghana).
2. Gold’s “poorer cousin”: Silver—which has been used by humans since ancient times, and which researchers recently discovered was melted down into coins and used by 7th century medieval chieftains in England to boost their local economies—has been following gold, with a 10% increase last week alone. In India, the world’s largest consumer of silver (and 2nd largest consumer of gold), imports surged to record highs in February and are set to climb more than 60% year-on-year: “India’s imports could rise to 6,000 tons in 2024, from last year’s 3,625 tons, driven by robust demand from the fabrication and solar industries…people were also buying metal for investment purposes, believing it will provide higher returns than gold.”
3. US markets: Inflation is ramping up again, delivering a blow to traders anticipating Fed rate cuts this year. The S&P 500 was down on the news, while Treasury yields rose (yields move inversely to prices): “Benchmark 10-year yields, which move inversely to bond prices, hit their highest level since November on Wednesday as they breached 4.5%, while two-year yields hit 5% on Thursday.” As WSWS noted last month in the context of the rapidly growing US national debt, “This market [the Treasury bond market], the foundation of the US and global financial system, has expanded to around $27 trillion, a 60 percent increase over the past five years. It is now six times larger than it was before the global financial crisis of 2008.” It is currently estimated that the debt is rising by roughly US$1trillion every 100 days, with debt service costs alone estimated to rise to 3% of GDP by 2028.