GOLD is all the rage now.
The rush for physical gold is leading to shortages.
It is also bringing back an old discussion – how much gold do central banks keep, why do they keep it and where do they keep it?
Central banks are the biggest buyers of gold.
A significant portion of this gold is held in storage at the Bank of England (BoE), which has been the world’s primary custodian of gold for centuries.
A mix of factors is now fuelling interest in gold, a key one being macroeconomic jitters with the new Trump administration announces significant tariffs on imports from Canada, Mexico and China.
Throw in the growing distrust of fiat currency stability, and capital has been sent flowing toward gold.
Central banks, particularly in emerging markets, are rushing to stack up bullion, reinforcing its role as a strategic reserve asset and a hedge against inflation.
And yet, when I turned to the World Gold Council’s latest report, central bank demand was roughly flat in the first half of 2024.
Still, the gold market is ablaze.
Spot prices have been on a tear but what’s even more intriguing is the velocity in the futures market, which is outrunning the spot like a trader front-running a Fed pivot.
The divergence between the spot and futures markets signals aggressive positioning, suggesting that big players aren’t just in it for the paper trade; they want the “real thing”.
At the time of writing, the spot price of gold was around the US$3,085.03 to US$3,099.90 USD per ounce range – up by 17.5 per cent since the start of the year.
Compared to a year ago, prices have risen by about 45 per cent.
The bullish tilt in the futures curve suggested demand for physical gold is outpacing supply, leading to whispers of a potential squeeze.
If this momentum continues, gold could see fresh legs with key resistance levels at US$3,300 and beyond.
In the meantime, is London losing its shine as a gold hub?
The hub for gold activity is London due to its long-established infrastructure and regulatory framework provided by the London Bullion Market Association (LBMA) for both physical and paper gold.
Paper trading in gold is done through the futures market, where investors enter into contracts to buy or sell the metal at a future date for an agreed-upon price.
These contracts allow traders to speculate on gold price movements without physically owning the metal.
However, the reliability of the LBMA’s paper contracts is being questioned, especially following the large outflows of physical gold from the BoE to New York in recent months as traders aim to capitalise on the higher premiums on New York’s Comex futures market.
In January alone, the BoE saw a record outflow of about 8,000 gold bars, or about 2 per cent of its total gold reserves.
Elsewhere, JPMorgan Chase plans to transfer some US$4 bln worth of gold from London to New York.
However, the market is facing unprecedented delays in physical gold deliveries with wait times extending to four to eight weeks from the usual few days, it has been reported.
Reports of delays in physical deliveries and large outflows from the BoE’s vaults are fuelling speculation that the market may be tighter than it appears.
If true, this could amplify the already bullish sentiment and lead to an even more pronounced divergence between physical and paper gold markets.
In recent years, other countries have also been moving gold out of London.
Last year, India brought home about 100 tonnes of gold.
Since the Russia-Ukraine conflict, India reportedly acquired gold at a faster pace than any other Group of 20 country, surpassing both Russia and China.
Although fiat currencies are no longer backed by gold, it remains the bedrock of “financial insurance” for nations that aren’t keen on putting all their eggs in the US dollar basket.
China, India, and Turkiye have been quietly but steadily increasing their gold reserves, a move that speaks volumes about their long-term view on currency risk and global economic stability.
These nations are diversifying away—what I call being misled—from the US dollar hegemony, using gold as an anchor to hedge against potential currency debasement and geopolitical risks.
The US, Germany, France and Italy have around 70 per cent in gold as a percentage of their total reserve holding, my monthly analysis “Gold and Dollar” showed.
Russia and Turkey hold about one-third in gold.
Some central banks like the Reserve Bank of Australia (RBA) also engage in gold lending to generate additional yield.
However, it can be a double- edged sword, exposing the lender to counterparty risk, especially with the risk-reward calculus more complex due to surging demand.
Bank Negara Malaysia (BNM), though, is more conservative.
The local central bank’s gold holdings have been relatively stable, having risen on average around 5 per cent-6 per cent over a decade.
After the launch of the central bank’s Annual Report 2024, I had a meeting with a BNM official who explained that the bank does not publicly reveal the finer details of its investment strategy or intent.
Nevertheless, the report makes clear that BNM maintains a well-diversified reserves portfolio, comprising various highly liquid financial assets — gold among them.
From the figures disclosed, it’s evident that BNM prioritises foreign exchange liquidity while pursuing long-term capital preservation and modest, consistent returns.
Malaysia’s stable approach reflects its diversified economic structure and tailored monetary policies.
We are relatively diversified, thus reducing the need to rely heavily on gold as a hedge against economic volatility.
Our currency regime is no longer backed by gold, so BNM has the flexibility to manage reserves in a manner that reflects a balance between maintaining sufficient gold reserves and other foreign assets to support domestic economic needs.
As for Malaysia’s value proposition, the country has a history of gold mining, although its contribution to the global gold supply is modest.
With gold prices rising significantly, shouldn’t Malaysian gold mining companies be doing well?
There is a stereotype about the kinds of people who operate mining companies.
They are thought to be wildly optimistic, ever keen to start the next big project, and to care little for the niceties of making shareholders richer.
They end up digging a lot of big holes in the ground and generating poor returns.
That stereotype has had a lot of truth to it in recent decades.
Between 2011-15 the five biggest gold miners took US$80 bln in impairments on mergers they overpaid for and on projects with cost overruns.
Investors won’t buy mining stocks until they are sure management teams are not up to their old tricks.
Investors want free cash flow, not more mines.
When it comes to publicly listed gold mining companies operating in Malaysia, they seem to be incapable of producing the necessary results.
Part of the problem may lie in the fact that ownership of the gold deposits often belongs to different parties, not to mention state and other royalties to be paid.
Another anomaly is that most Malaysian-listed gold mining companies are listed in foreign exchanges, and their shares have remained in the doldrums for much of the time.
Take Besra Gold Inc, listed on the Australian Stock Exchange in 2021, which raised A$10 mln to develop its Bau gold project in Sarawak.
The stock has dropped 60 per cent in the last month alone, now trading at a mere 2.9 Australian cents with a market capitalisation of only A$11.3 mln.
Aside from being loss-making, Besra is in a real fix – its mining licence has expired, and it is still awaiting renewal from Sarawak’s State Mining Mineral Authority.
Since the licence was issued years ago, when Sarawak was under a different leadership, it’s uncertain whether it will be renewed.
The company is also facing a shareholder dispute.
Last January the board called a meeting to remove Datuk Lim Khong Soon as a director.
Another Malaysian miner listed abroad is Singapore-listed CNMC Goldmine Holdings Ltd, with a market capitalisation of S$120 mln.
For financial year 2024 (FY24), it reported a doubling of profits to US$9.8 mln on the back of soaring gold prices, though this isn’t enough to attract new investor attention.
Its flagship asset is the Sokor mine in Kelantan.
Then there’s Monument Mining Ltd, listed in Canada and trading at 32 Canadian cents with a market capitalisation of C$106 mln.
It owns the Selinsing Gold Mine in Pahang and reported a net profit of US$11.8 mln for the six months ended Dec 31, 2024.
However, its past losses raise questions about the sustainability of these profits.
On Bursa Malaysia, Niche Capital Emas Holdings Bhd, with mining operations in Kelantan, reported a loss of RM4.8 mln for the six months ended Dec 31, 2024, for its FY25 ending June 30.
Clearly, these are not glittering stocks for investors seeking gold exposure.
Quants at JP Morgan forecast prices to reach US$2,900 to US$3,000 by mid-year and US$3,100 to US $3,200 by year-end.
Building on that momentum, my team and I revised our own year-end target upward to US$3,300 just last week.
The views expressed here are those of the writer and do not necessarily represent the views of Sarawak Tribune. The writer can be reached at med.akilis@gmail.com
