(Kitco News) - If history is any judge, Western investors are once again positioning themselves on the wrong side of the gold trade as the precious metal continues to flow to the East, according to one natural resource investment firm.
In their first-quarter investment letter published last week, fund managers Leigh Goehring and Adam Rozencwajg noted that Western investors lost their influence in the gold market as they continued to liquidate their gold holdings in the first quarter of the year, even as prices continued to rally.
The analysts said the 18 physically gold-backed exchange-traded funds tracked by the firm saw outflows of 108 tonnes in the first quarter of 2024. A further 50 tonnes were liquidated in the six weeks following April 1.
“Western investors continue to sell their gold while Central Banks and Chinese and Indian retail investors continue to buy aggressively,” the analysts said in the report. “With gold making record highs, it is clear who is winning.”
Goehring & Rozencwajg noted that a trend is starting to emerge, similar to the last bull run from 1999 to 2011, when prices went from $253 to $1,900.
“In the 1999-2011 rally, Western investors only purchased gold at the very end, once the bull market was mostly over, and immediately ahead of a significant pullback. Gold can rally with little Western participation - it certainly did in the 2000s,” the analysts said.
Asian retail investors are also getting a little help in the tug-of-war with Western investors. Emerging market central banks, led by China, continue to buy gold at an unprecedented pace. The fund managers noted that India also bought 17 tonnes of gold in the first quarter of this year – as much as they did in all of 2023.
Goehring & Rozencwajg reiterated their view that central bank gold demand is signaling a change in the global monetary policy regime. They noted that these shifts have occurred when commodity prices were dramatically undervalued relative to financial assets.
“Prior periods of radical commodity undervaluation occurred in 1929/30, 1968/71, and 1997/99. Today’s Commodities are more radically undervalued than ever in the last 140 years,” the analysts said in the letter. “Just like in the past, we believe a monetary regime change is forthcoming and that the central bank’s massive gold accumulation signals that the change might occur much sooner than anyone thinks possible.”
Goehring & Rozencwajg said that gold and silver have embarked on a substantial bull market and are poised to see significantly higher prices.
“With central banks continuing to buy and Western investors retreating, the stage is set for the gold rally to continue,” the fund managers said.
