Gold prices hit new all-time highs of $2,182 an ounce on March 11, 2024.1 The rise of the October 5, 2023 lows marked a 19.91% price increase in a little over five months.2 Needless to say, there has been quite a party going on in gold markets recently.

So why wasn’t everyone invited?

Central banks have been adding to their gold holdings for several years, and hedge funds have dramatically increased their gold exposure on futures exchanges over the last month. Adding to exposure has allowed them to attend the price party. On the other hand, ETF investors have been selling gold – and have less of it – now than a few years ago.

What led to the difference in opinion on gold?

Foreign Central Banks purchased 1,081 tons of gold in 2022 and 1,037 tons in 2023, the number one and two highest yearly official sector purchases on record.3

Foreign central banks are selling US treasury bonds and buying gold to marginally diversify away from US dollar holdings after the last four US presidents used the US dollar exchange system to enforce US foreign policy. China has reduced US treasury holdings by 38% between November 30, 2013, and December 31, 2023.4

The Peoples Bank of China, the central bank, has been a consistent gold purchaser, as February marked the sixteenth consecutive month of purchases.5 Foreign central bank demand increases are the result of "a deeper malaise" amid "the West's proclivity to deploy unilateral financial sanctions," according to the Council of Foreign Relations.6

Helping lead the more recent gold gains was a significant jump in the open interest of gold futures on the COMEX.7 Since February 20, 2024, open interest climbed from 407,000 contracts to 536,000, a 30% gain in interest.8 That is still a fair bit away from the open interest of 800,000 contracts on January 15, 2020, but the point remains it is a significant and sudden increase. Hedge funds – typically the more prominent investors in futures markets due to leverage ability – likely participated in that gain.

While it is difficult to ascribe a reason to such a diversified group as hedge funds, one thing is true: the last three times the federal funds rate9 hiking cycle ended, gold made some pretty extraordinary gains. In 2000, 2006, and 2018, the peak of the last three hiking periods, gold went on to gain 57%, 235%, and 69%, respectively. Perhaps some in the investment community believe we are getting close to the first Federal Reserve10 cut. Markets have priced in a 53% chance of a rate cut in June.11

ETF investors have a different view

Since April 22, 2022, ETF investors have sold 750 tons of gold to March 14, 2024. ETF investors now hold fewer ounces of gold than at any time since September 25, 2019.12

On the other hand, ETF investors make gold allocation decisions based on the level and direction of real interest rates – interest rates minus inflation. As real interest rates rise, investors sell gold to buy interest-bearing securities. Since January 2022, real interest rates have risen from 0.1% to 1.8%, so this investor segment is selling gold and buying interest-bearing assets like money market funds and bonds. That could change if the federal funds rate9 is cut in the coming months.

Another stark contrast

The price rise in gold also highlights another stark contrast.

While gold is trading at an all-time high price,13 the silver price is at a 50% discount to its all-time high.14 To find out why, we contrast the major sources of demand for gold and silver.

Gold demand is typically 50% from jewelry and 13% from industrial activities, which include technology, electronics, and dentistry. Yearly demand from the jewelry and industrial sectors is mostly stable, while demand from central banks and the ETF sectors are highly variable. Central banks and treasuries make up official sector demand, which rose from 8.8% in 2017 to 23.3% last year,15 representing a dynamic change in demand. ETF investor demand fell from +892 tons in 2020 to -244 tons in 2023,15 an even more dramatic change.

In contrast, silver demand is typically 17% from jewelry and 50% from the industrial sector, nearly the opposite weighting of gold. It is important to note that industrial demand is correlated to the economic health of the global economy, especially the Chinese economy. Silver bars, coins, and silver ETFs can account for 25% of demand, and it is also variable. In contrast to gold, the official sector has a de minimis factor of less than 0.2%.16 Silver demand is driven more by the health of the industrial economy and ETF flows.

China optimism may bode well for commodities

The global industrial economy's strength has been underappreciated for over a year. China ended zero COVID policies at the end of 2022 in a move that surprised investors and created some optimism. However, Chinese economic stimulus packages last year were much smaller than similar shock-and-awe-sized US stimulus packages, causing the Chinese economy to underperform expectations. Yet incremental stimulus packages continue to be released as Beijing attempts to achieve a 5% GDP growth in 2024.17

Some reasons for optimism about the Chinese economy:

  • The recently released budget shows government spending minus taxes and fees levied amounts to a fiscal package that is the strongest since 2020, in proportion to the size of the economy.
  • Chinese banks extended a record-high amount of new loans during the first month of 2024
  • The five-year loan prime rate was lowered by 25 bps in February, marking the first cut since June 2023 and the largest cut in history.
  • Aggregate financing increased by 6.5 trillion Chinese yuan (CNY)18 in January, up from 1.94 trillion CNY in December.
  • Purchasing managers’ index (PMI)19 gauges showed general improvement in both services and construction.
  • The number of domestic tourism trips during the eight-day Lunar New Year holiday rose 34% from last year's level to a record high of 474 million visits.20

The optimism has not yet flowed into the pricing of related assets that trade at historical discounts, including silver, industrial metals, and emerging market equities.

Final thoughts

ETF investors have sold 317 million ounces of silver between February 2, 2021, and March 15, 2024.21 Silver is trading at $24 an ounce, roughly a 50% discount from its all-time high which occurred in April 2011 at $48.55 an ounce.22 We find it particularly interesting that the April 2011 silver price occurred during extreme solar panel growth. A 1-megawatt solar panel installation contains 5,000 solar panels, each with 20 grams of silver in them, totaling 3,500 ounces of silver.

Historically when gold prices are so much higher than silver, it marks a period of lower interest rates before the industrial economy improves. This can be seen in October 2008, March 2016, and March 2020, which produced silver returns of 434%, 40%, and 143%, respectively.23

Stay tuned.

1 Bloomberg gold price, March 2024.
2 Bloomberg gold price return, 10/5/2023–3/11/202.
3 "Gold Demand Trends Full Year 2023." World Gold Council, January 2024.
4 Bloomberg China-US treasury holdings, 11/30/2013–12/31/2023.
5 "China Splurges on Gold For a 16th Month as Price Hits Record." Bloomberg, March 2024.
6 The Council on Foreign Relations is an American think tank for US foreign policy and international relations.
7 COMEX is one of the four exchanges including CME, CBOT, and NYMEX that make up the CME Group of exchanges. COMEX specializes in precious, base, and ferrous metals trading.
8 Bloomberg COMEX exchange open interest gold contracts, 3/20/2019–3/15/2024.
9 Federal funds rate is the target interest rate set by the Federal Reserve at which commercial banks borrow and lend their extra reserves to one another overnight.
10 Federal Reserve is the central banking organization for the United States.
11 Bloomberg, March 2024.
12 Bloomberg ETF gold holdings, 9/25/2019–3/15/2024.
13 "Here’s Why Gold Is At A Record High Despite Strong U.S. Stock Market And Economy." Forbes, March 2024.
14 Bloomberg silver price, 1/1/1949–3/15/2024.
15 "Historical demand and supply." World Gold Council, January 2024.
16 The Global Source. Silver Supply & Demand. The Silver Institute.
17 "China vows to 'transform' economy, sets ambitious growth target." Reuters, March 2024.
18 CNY is Chinese Yuan, the official currency of China.
19 PMI is Purchasing Managers Index that summarizes whether market conditions are expanding, staying the same or contracting as viewed by purchasing managers.
20 "China's travel spending during Lunar New Year holidays beats pre-COVID levels." Reuters, February 2024.
21 Bloomberg ETF silver holdings, 2/2/2021–3/15/2024.
22 Bloomberg silver price, 4/1/2011 and 3/15/2024.
23 Silver price 10/27/2008–4/28/2011, 2/26/2016–8/2/2016, and 3/18/2020–8/10/2020.

Important information

The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Trading in commodities entails a substantial risk of loss and is not suitable for all investors.
Diversification does not eliminate the risk of experiencing investment losses.
Prospectuses for abrdn Physical Gold Shares ETF, abrdn Physical Palladium Shares ETF, abrdn Physical Platinum Shares ETF, abrdn Physical Precious Metals Basket Shares ETF and abrdn Physical Silver Shares ETF
Projections are offered as opinion and are not reflective of potential performance.
Projections are not guaranteed, and actual events or results may differ materially.
ALPS Distributors, Inc. is the marketing agent.
There are risks associated with investing including possible loss of principal.
ALPS is not affiliated with abrdn.

ETF002170 2/28/25