The West–East Ebb and Flood of Gold Revisited
The West–East Ebb and Flood of Gold Revisited
Understanding the 90-year pattern that drives global gold flows and market dynamics
The Enduring Pattern of Global Gold Trade
Gold trade between West and East still follows a ninety-year-old pattern. The price of gold is mainly set by Western institutional supply and demand, while countries in the East take the other side of the trade. As a result, above ground gold moves from West to East and back in sync with the price of gold decreasing and increasing.
Knowledge of this pattern is imperative to understanding the gold market and the price of gold. The tides of the gold market repeatedly "ebb and flood" from West to East and back again, creating predictable trading flows that sophisticated investors can leverage for better market timing.
Investment Insight
Understanding these West-East gold flows helps investors time their gold purchases more effectively. When Western institutional demand drives prices higher, Eastern markets often provide selling pressure, creating opportunities for strategic accumulation during these cycles.
Global Gold Flow Analysis
The Ebb and Flood Pattern Explained
Global Gold Flow Dynamics
Sets gold prices through institutional supply and demand
- London wholesale market
- Swiss refining centers
- US futures markets
- Investment fund flows
Takes the other side of Western trades, dampening volatility
- Price-sensitive buyers
- Long-term store of value
- Cultural gold affinity
- Physical accumulation
How the Pattern Works
In general, economies in the East are financially less advanced than in the West. Whilst it's considered normal in the West to keep all of one's wealth within the banking system, people in the East are still accustomed to keep their savings partially in physical gold.
- Gold prices rising sharply
- Western institutional buying
- Eastern profit-taking and selling
- Gold flows from Asia to London/Zurich
- Gold prices declining or stable
- Western institutional selling
- Eastern value-buying opportunity
- Gold flows from London/Zurich to Asia
The welfare state and financialization have slowly removed gold from Western people's day-to-day lives. People don't pay much attention to gold when they feel financially confident. Western investment funds trade gold based on models ever seeking the highest yields in the shortest possible timeframe.
In the East they don't mind taking the other side of this trade. Close affinity with gold as a store of value makes Easterners price sensitive and have a long time horizon regarding this asset. The West thus sets the price, and the East dampens volatility.
Key Regional Trading Centers
Western Trading Hubs
- London, UK: Heart of global wholesale market
- Switzerland: Refining capital and storage hub
- New York, US: COMEX futures trading
- Toronto, Canada: Mining finance center
Eastern Trading Hubs
- Hong Kong: Asian financial gateway
- Singapore: Southeast Asia precious metals hub
- UAE (Dubai): Middle East trading center
- Shanghai: China domestic market access
Market Infrastructure
For our present study it's relevant to be acquainted with these regional trading centers. Mapping every gold trade of every country with every other country is impossible, so we focus on the price differences and gold flows between key countries, trading hubs, and regions to expose the ebb and flood framework.
2020 Market Analysis: The Pattern in Action
Since January 2020 there hasn't been an epic ebb or flood movement in tonnages, but the spirit of the pattern is as alive today as it was throughout its entire existence. In 2020 the expected real interest rate in the US plunged, which boosted gold from $1,517 per troy ounce to roughly $1,900 by year end.
Bull Market Begins
Expected real interest rates plunge, gold starts climbing from $1,517/oz. Western institutional buying accelerates as inflation expectations rise.
COVID-19 Disruption
Pandemic lockdowns disrupt physical gold transport. Eastern demand collapses as prices rise, creating steep discounts in Shanghai markets.
Peak Reached
Gold reaches $1,900/oz. UK imports 1,175 tonnes total, while Eastern markets show negative premiums and begin exporting gold westward.
As the pattern would suggest, the West was buying, and demand in the East collapsed with some countries selling. This created one of the clearest demonstrations of the ebb and flood pattern in recent history.
Country-by-Country Flow Analysis
The People's Bank of China (PBoC), which oversees the Chinese gold market, prefers the Chinese populace to hoard gold rather than dishoard, in order to safeguard China's financial wellbeing. Gold export from the Chinese domestic gold market is restricted by the PBoC.
Shanghai Premium Analysis
The 2020 discounts in Shanghai were much larger than in the bull market from 2000 until 2011. The Chinese gold market was liberalized in 2002 but became sizable only by 2010. From 2013 until 2018 the Chinese net imported more than 8,400 tonnes, which thereafter was able to cause more selling pressure from China than before.
As indicated by Shanghai premiums, net gold imports into China often rise when the price declines and vice versa. Remarkably, the Chinese are more sensitive to the dollar price of gold than the gold price in renminbi.
The situation in India in 2020 was similar to China. Though not as accurate as in Shanghai, the average premium to London spot of gold prices across 14 cities in India, regularly moves in the opposite direction of the gold price.
India too, since 2017, has restrictions on the export of gold bullion. Nevertheless, the pattern can be identified showing Indian monthly net gold imports versus the gold price. The Indians are more sensitive to the rupee gold price.
Let's turn to Thailand, a country in the East that does allow bullion export. The data shows that the gold market in Thailand aptly fits the ebb and flood framework, demonstrating remarkable sensitivity to sudden price movements.
Historical Pattern Confirmation
Thailand was struck by the corona crisis and people sold gold to raise cash in 2020. However, Thailand was also a net exporter in just about any month the price went up in years prior to 2020. In March 2022, when gold rallied to a near all-time high, Thai media reported people queuing at gold shops to sell their gold for cash because prices reached new heights.
COVID-19 Impact on Gold Logistics
The corona crisis turned 2020 into an unusual year, to say the least. But it wasn't the lockdowns or other anomalies that made gold flow from East to West. The primary reason for the gold movement from East to West in 2020—and from West to East in 2022—was the price of gold set in the West.
2020 Gold Flow Disruptions
Around March, governments on all continents implemented lockdowns and airliners were grounded to stop the virus from circulating. An unintended consequence was that gold, ordinarily carried on passenger flights, was temporarily immobilized. The spread between the gold price in London and on the COMEX in New York started widening.
Market Dislocation
For whatever practical reasons, bullion banks decided to charter cargo planes and sent substantial amounts of "large bars," perhaps borrowed from central banks, from the UK to Switzerland in April and May. Gold in Switzerland was mainly cast into 100-ounce bars for selling on the COMEX in the US at a hefty premium.
2022 Market Reversal: Pattern Confirmation
In all of the data that includes information into 2022, it shows the market went into reverse, from ebb to flood, during gold's descent in 2022. Premiums in China and India went up as well as their net imports. And Switzerland, the UK and the US were dishoarding to the East.
The pattern was still effective in 2022 and so too 2020. This demonstrates the enduring nature of the West-East gold flow dynamics, regardless of external market disruptions.
Pattern Resilience
For investors tracking gold price movements, understanding this pattern provides valuable context for market timing. When Western institutions drive prices higher, Eastern markets often provide the supply to meet that demand, and vice versa.
TIPS Yield Correlation Changes
From 2006 until early 2022 the gold price was inversely correlated to the expected real yield on 10-year US government bonds. This yield equals the "10-year TIPS yield." TIPS yield up, gold down and vice versa.
Gold vs TIPS Yield Correlation Analysis
2013: TIPS yield rose 1.5%, UK exported 345 tonnes in May alone
2022: TIPS yield rose 2.5%, but UK's net sales were much lower than 2013
Conclusion: The West is still in the driving seat but is changing how gold is priced to the upside
Since February the correlation between gold and the TIPS yield started weakening. Gold went down from April until October 2022, though not as far as the TIPS yield prescribed. Because the West still drives the gold price, the change in how gold is priced must primarily originate in the West.
Bullish Implications
In 2022 the West dishoarded about half of what it did in 2013 despite a larger TIPS yield move. This suggests the West is still in the driving seat but is changing how gold is priced to the upside—a potentially bullish sign for long-term gold investments.
Market Implications and Investment Strategy
The ebb and flood framework provides clarity when observing the gold market. News that comes out about gold exports from Switzerland to countries in the East, or local premium statistics, can be easily put into context if one is familiar with the pattern.
Investment Application
Additionally, it helps us to better understand the price of gold. How much gold bangles Chinese housewives are buying won't give us a feel for where the price is going. As long as the pattern exists, we are better served by analyzing what happens in the West. As the world's most liquid spot market, the UK's net physical flow is what basically drives the price of gold.
Derivatives markets have a major impact on the gold price, but the forces from those markets are translated into physical buying and selling by arbitragers in London. Only physical supply and demand can change the price of physical gold.
Strategic Insights for Investors
Understanding these patterns can inform investment timing strategies. When Western institutional demand drives gold prices higher, Eastern selling pressure often emerges, creating potential buying opportunities during corrections. Conversely, when Western selling pressure emerges, Eastern accumulation typically provides price support, suggesting good entry points for physical gold purchases.
The pattern demonstrates gold's unique position as both a Western institutional asset and an Eastern store of value. This dual nature creates the ebb and flood dynamics that have persisted for nearly a century, providing sophisticated investors with a framework for understanding global gold market movements.
Of course, there are numerous exceptions to the pattern, such as currency crises where local populations buy anything they can—real estate, automobiles and gold—to protect their savings. However, the overall framework remains remarkably consistent and valuable for market analysis.