Sprott is a Toronto-headquartered asset manager specializing in precious metals and critical materials (NYSE/TSX: SII), tracing its roots to Sprott Securities founded by Eric Sprott in 1981 and now led by CEO Whitney George. It runs physical gold, silver and uranium trusts, ETFs, active strategies and resource lending, with about $65bn in AUM. The Insights column carries monthly commentaries and white papers on uranium, gold, silver, copper and critical materials by Paul Wong, Jacob White and John Hathaway (ex-Tocqueville gold manager) — note the house's structurally bullish commodity stance, as it sells the corresponding trusts and ETFs.
This report explains why gold is becoming more important. The key idea: central banks (like China's) are buying gold at record levels—three times more than before—while regular investors are selling very little. This gap means investment demand for gold will likely have to rise, pushing prices up. The report also warns that a flood of new US Treasury bonds could shake markets, making gold—a neutral asset not tied to any country—even more attractive. In short, central banks are hoarding gold while investors sit on the sidelines, a setup that historically leads to higher gold prices. Worth reading for the clear data behind the bullish case.
Sprott's report points out that central banks have accelerated gold purchases due to de-dollarization, reserve diversification, and hedging against inflation, with gold's role as a neutral reserve asset becoming increasingly prominent. Despite record central bank gold buying, investment-driven selli
This chapter focuses on the performance of the gold market in May 2023 and structural shifts in demand. The report notes that despite a short-term pullback in gold prices, a stark contrast emerges between record central bank gold purchases and the exhaustion of investment selling. Gold is transitioning from a financial asset to a neutral reserve asset. Gold closed at $1,962.73 in May, down 1.37% for the month, but still up 7.60% year-to-date.
The author’s central judgment is: Gold’s investment selling has neared exhaustion, and future investment demand will likely be forced to rebound. The contrarian view lies in the fact that the market broadly focuses on the short-term pullback in gold prices (down 1.37% in May), but the author argues this is merely technical consolidation under thin liquidity, not a trend reversal. The annualized rate of central bank gold purchases has reached 1,456 tonnes, nearly three times the previous annualized rate of 506 tonnes, while CFTC and ETF investment flows have fallen to their lowest levels since 2018, creating a record gap of 1,800 tonnes.
1. Central Bank Purchases Continue to Accelerate: Net purchases in Q1 2023 totaled 243 tonnes. Since Q3 2022, the annualized purchase rate has been 1,456 tonnes, 2.88 times the previous annualized rate of 506 tonnes. Drivers include de-dollarization, sanctions/asset seizure risks, weaponization of the dollar, hedging against inflation, and counterparty risk amid geopolitical tensions.
2. Strong Chinese Demand: The PBOC has increased its gold holdings monthly since October 2022, with reserves reaching 67.30 million ounces (2,092 tonnes) as of May 31, a record high. The Shanghai gold premium has remained above its 10-year average since October 2022.
3. Exhaustion of Investment Selling: During the May pullback, CFTC long positions only reduced by approximately 5 million ounces, with no active short selling; ETF holdings edged up 0.75% (to 94.16 million ounces), with no sell-off. The gap between central bank purchases and investment flows stands at 1,800 tonnes, the highest on record.
4. Market Liquidity Risks: Net issuance of U.S. Treasury bonds is expected to increase in the second half of 2023, potentially triggering liquidity challenges that could lead to asset price declines, tighter liquidity, and banking sector stress. In May, the U.S. dollar index rose 2.62% to 104.33, exacerbating the pullback in high-beta assets (silver down 6.26%, gold mining stocks down 8.78%).
Comparative Data Table:
| Indicator | 5/31/2023 | 4/30/2023 | Monthly Change | Monthly % Change | YTD % Change |
|---|---|---|---|---|---|
| Gold Spot | $1,962.73 | $1,990.00 | -$27.27 | -1.37% | +7.60% |
| Silver Spot | $23.49 | $25.05 | -$1.57 | -6.26% | -1.96% |
| NYSE Arca Gold Miners | 858.10 | 940.72 | -82.62 | -8.78% | +6.53% |
| U.S. Dollar Index | 104.33 | 101.66 | +2.67 | +2.62% | +0.78% |
| S&P 500 Equal Weight Index | — | — | — | -3.99% | -1.43% |
1. Go Long Gold: The extreme divergence between central bank purchases and exhausted investment selling suggests investment demand will likely be forced to rebound, with upside risks for gold prices outweighing downside risks.
2. Monitor Liquidity Risks: A surge in U.S. Treasury issuance in the second half of 2023 could trigger market turmoil, benefiting gold as a neutral reserve asset and safe-haven tool.
3. Avoid High-Beta Assets: In an environment of a strengthening dollar and tightening liquidity, silver and gold mining stocks face greater short-term volatility. Priority should be given to allocating physical gold or gold ETFs.
4. Focus on Chinese Demand: The PBOC’s continued accumulation and elevated Shanghai premiums indicate strong structural demand for gold from China, providing key support for gold prices.
This chapter focuses on how three structural factors—the de-dollarization process, rising geopolitical risks, and supply pressure in the U.S. Treasury market—collectively form a long-term bullish thesis for gold. The report argues that these factors are driving gold's reintegration into the international financial system as a neutral reserve asset.
The author's core judgment is: Gold is gradually returning to the international financial system, becoming a neutral reserve asset for settling multi-currency energy and commodity trades. This trend is long-term and structural, not short-term cyclical.
Counter-intuitive/contrarian market views:
1. Although the U.S. dollar will remain the anchor currency in the short term, the weaponization of the dollar is the most powerful non-economic driver of de-dollarization, and its impact is underestimated by the market.
2. The U.S. Treasury market may face a net issuance pressure of approximately $2 trillion in the second half of 2023. This scale has never coincided with the current multiple risks (liquidity, credit, inflation, banking stress) in history, which is highly favorable for gold.
1. De-dollarization Process:
2. Geopolitical Risks and Gold:
3. U.S. Treasury Supply Shock:
| Asset/Indicator | Role/Data | View |
|---|---|---|
| Gold | Spot $1,962.73 (5/31), YTD +7.60% | Bullish. Continued central bank buying + convergence of multiple risks may drive gold prices higher |
| Silver | Down 6.26% in May | No clear bullish/bearish view |
| NYSE Arca Gold Miners Index | Down 8.78% in May | No clear bullish/bearish view |
| U.S. Treasuries | Net issuance ~$2 trillion in H2 2023 | Bearish. Supply pressure may lead to market dysfunction and rising yields |
| U.S. Dollar | Global reserve share declining | Long-term bearish, but remains the anchor currency in the short term |
| Renminbi | Global reserve share ~2% | Potential to rise, but requires significant reforms |
1. Increase allocation to gold: With continued central bank buying, the U.S. Treasury supply shock, and rising geopolitical risks, gold prices have the potential for an upside squeeze in the second half of 2023. This is the first time in history that all factors favorable to gold—liquidity risk, credit tightening, Treasury market dysfunction, bond volatility, inflation, and regional banking stress—have converged within such a short time window (two quarters).
2. Be wary of U.S. Treasury market risks: Investors should closely monitor the MOVE index and the Bloomberg liquidity index. If the market cannot absorb the $2 trillion in net issuance, it could trigger asset price declines and liquidity tightening, further exacerbating banking stress, which in turn would support gold.
3. Monitor the renminbi internationalization process: Although the renminbi is unlikely to challenge the dollar in the short term, China's initiatives to settle oil imports in renminbi may accelerate reserve diversification, indirectly boosting demand for gold as a neutral reserve asset.