Key points
- There's speculation that a central bank is snapping up gold at around US$1,800/ounce, reports Bloomberg
- The whale (large buyer) is covering its tracks well with little evidence of buying frenzy
- But gold's 19 failed attempts to break below US$1,800 since July 2020 points to strong support for bullion
Rumours that a large buyer is snapping up gold could bring relief to ASX gold shares after a poor start to 2022.
The gold price has repeatedly tried and failed to drop significantly below US$1,800 an ounce despite worsening fundamentals.
This prompted Bloomberg to speculate that there is a "whale" stepping in to buy the precious metal every time the price dips below that price point.
Why ASX gold miners have lost their shine
That would be great news for ASX gold producers. The Newcrest Mining Ltd (ASX: NCM) share price, Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) share price are all nursing losses of around 10% each since January.
The dimming outlook for the store of value is driven by the prospects of a sharp rise in global interest rates.
Unlike bonds, gold doesn't pay a dividend or coupon. Higher rates will make it more attractive for safe haven investors to buy government bonds instead of holding gold.
Whale buyer as elusive as Moby Dick
If there is a very substantial buyer of gold that's backstopping the gold price, ASX gold shares could find renewed buyer interest. This is particularly so if the Australian dollar continues its downtrend against the greenback.
There is no evidence to prove or disprove the whale theory. But it might explain why the gold price attempted 19 failed attempts to drop below US$1,800 since July 2020.
"In the past year, the modeled value of gold, based on a regression study that includes the dollar, real rates and ETF holdings, dropped nearly 10%," reported Bloomberg.
"Yet the metal's price only fell around 2%. Clearly, there is a big buyer who considers the metal a long-term hold."
On the hunt for a whale
Whale or not, the buyer or buyers are skilled at avoiding detection. The buying activity is not showing up in Exchange Traded Fund (ETF) holdings or in the futures market.
This means that the big buyer is making its purchases in the London over-the-counter market, speculated Bloomberg.
But again, finding evidence of such activity is hard. Gold holdings at vaults under the London Bullion Market Association purview only showed a small two million troy ounces rise to 309 million troy ounces in the year to December 2021.
The London Bullion Market Association's vaults include holdings from ETFs and some central banks.
Big gold buyer likely to be a central bank
"That would suggest that whoever is buying is able to buy in scale, leave little footprint in the market and then take delivery and store the metal in secure, invisible vaults," added Bloomberg.
"And that points strongly toward a sovereign buyer."
While central banks usually declare their gold inventory to the International Monetary Fund (IMF), history shows this isn't always the case.
Bloomberg noted that China did not report any changes to its gold store from 2009 to 2015. It only confessed later that it purchased 53 million ounces of the yellow metal over the period.
ASX gold shares thriving in the mystery
Given the threat of US sanctions and heightened geopolitical tensions, it certainly makes sense for some central banks to favour gold in the event that they get cut off from the world's reserve currency – the US dollar.
This is one hypothesis that shareholders in ASX gold shares will be gleefully backing.
