Why the World’s Central Banks Are Going Gaga Over Gold
The world’s central banks are snapping up the metal at the fastest rate in almost half a century in a trend that looks poised to continue.
May 6, 2019 9:52 AM EDT
(CNBC, “The Street” ) – Central banks are going gaga over gold.
They are snapping up the metal at the fastest rate in almost half a century in a trend that looks set to continue.
“In all likelihood, we expect another strong year,” says Alistair Hewitt, director of market intelligence at WGC in London.
He notes that the volume of gold purchased by such institutions over the most recent four quarters was higher than for any calendar year since 1971. That was when President Richard Nixon pulled the U.S. off the gold standard monetary system at a time when gold was worth $35 a troy ounce.
Gold was recently fetching around $1,278 an ounce, down from the year’s high of $1,341 reached on February 19. Prices for the SPDR Gold Shares (GLD – Get Report) exchange-traded fund, which holds bars of solid bullion, have moved similarly.
The likely continued buying of the metal should also help lift gold mining stocks such as those held in the VanEck Vectors Gold Miners (GDX – Get Report) ETF, which holds a basket of gold mining shares that tend to benefit when the price of the metal rallies.
Emerging Markets Driving Demand
Central banks in emerging markets countries such as Russia are driving the push to buy more gold and diversify away from holding U.S. dollars. They started snapping up more of the metal in earnest just after the financial crisis of 2008-2009, reversing a trend of ditching the metal.
“This is part of a trend that began as long ago as 2010,” says George Milling-Stanley, head of gold strategy at Boston-based asset management company State Street Global Advisors. “That was when central banks switched over from sales to net purchases.”
In 2018 central banks purchased 657 tons of bullion, up from a mere 79 tons in 2010, according to the WGC report.
Milling-Stanley says that many countries in the developing world feel that they have far too many U.S. dollars in their reserves and they want to diversify by increasing their holdings of bullion.
“This buying is going to continue according to the emerging markets central banks that I talk to,” he says.
Rebalancing Reserves
Another WGC report shows that central bank holdings in the developing world are far smaller than in much of the developed world. For instance, three-fourths of the U.S. reserves are held in gold, while Germany holds seven-tenths of its reserves in bullion, WGC data shows.
Compare that to Russia, the biggest central bank buyer of the metal in the first quarter of the year, where gold amounted to 18.5% of the country’s reserves. The figures for China and India are 2.5% and 6.3%, respectively.
“They certainly want more gold across the board in emerging markets,” says Milling-Stanley.
Better than just buying the metal, he says that these government banks aren’t sensitive about prices. They will buy whether the price is high or low, at least once they’ve decided to accumulate more bullion for their country.
“They make the decision and they stick with it,” he says.
If the demand for gold from central banks continues, that should be good for the gold market because it all but guarantees that a significant portion of the annual supply of the metal will get taken off the market each year.
The 657 tons purchased by national central banks and similar institutions last year accounted for 14% of 2018’s total supply of gold, which comes mainly from mines and metal that gets recycled from used electronics and jewelry.
This year, central bank buying demand could be just as good if not better than it was in 2018.
“By the look of the figures they could repeat that or even surpass it this year,” says Milling-Stanley. “That is a very welcome development for the gold market as a whole.”
We at 401 Gold Consultants have reported these global purchases over the last few years and whole heartedly agree with the street’s conclusion that gold is headed higher. When the rest of the world recognizes a, ” gold standard” as a base for valuing their currencies, then the U.S. will shape the dollar based on the amount of gold each country holds, with the U.S. of course holding the most gold as the world’s reserve currency.
U.S. President Donald Trump has already voiced a return to a gold standard of sorts to rebalance the world monetary standard towards a more tangible asset base, and therefore avoid the massive liquidity currently burying countries under loose monetary policies like the Quantitative Easing program practiced by the U.S. Fed under President Obama.
Posted by :
Jack Dempsey, President
401 Gold Consultants LLC
jdemp2003@gmail.com