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Central banks have fallen in love with gold, again

How much do central banks love gold right now? Maybe more than Mike Myers’ character in Austin Powers Goldmember. But really, central banks can’t get enough of the shiny metal, collectively buying up a record 547 tons of gold in the first 3 quarters of 2019. That’s $23 billion of gold value injected directly onto the balance sheets of the acquiring central banks.

Why the love affair with gold?  Let’s just say that trade disputes coupled with slower economic growth have not instilled economic confidence in central bankers.  Other contributing factors include global tensions, currency wars, Brexit uncertainties and the course of de-dollarization.  The best move when fearful of a global economic meltdown is nothing short of buying as much gold as you can get your hands on.  The trend of increasing central bank gold purchases is expected to continue in the coming years.

Turkey, Russia, Poland, and China have led the way with their gold purchases in 2019.  Year to date central bank gold purchases have increased by 12% compared to 2018. As of the end of Q3, they have purchased 547.5 tons during 2019.  During Q3 alone, central banks added 156 tons to their balance sheets.   In fact, the Russians have doubled their gold reserves in the last five years.   Year to date, Russia has added 130 tons of gold to its central bank reserves. The Russian gold reserve now totals 2,242 tons.  The National Bank of Poland has added more than 100 tons to its gold reserve in 2019. Hungary, India, United Arab Emirates, Qatar, Kazakhstan, Kenya, and the Kyrgyz Republic have all been significant buyers of gold in 2019.  This year, all of these central banks have added more than one ton to their gold reserve.

And

We are currently living in the longest period of economic expansion on record. So, it should come as no surprise that central banks see the end of the road coming fast. A shift further into gold makes sense, seeing as the precious metal performed extremely well during the most recent 2008 global recession. In fact, gold prices hit close to an all-time high in response to fears of the US defaulting on its debt in 2011, topping $1,900 an ounce.

There is another factor to consider for central bankers, and that is of interest rates. As unbelievable as it may sound, central banks around the world are slashing interest rates down to zero or below, in an attempt to jumpstart economic growth that has been lacking. President Donald Trump has even been outspoken about his desire for US interest rates to be taken lower. Some believe that if rates were to continue to drop, gold could surpass $2,000 and reach new all-time highs as there would be less of a reason to shelter money in traditional savings vehicles that fail to provide any interest.

Central banks don’t want to get caught off guard they did in 2008 when the entire financial system almost collapsed. Instead, they are erring on the side of caution and stockpiling gold reserves..

report from the Dutch central bank highlighted this sentiment perfectly. “If the entire system collapses, the gold stock provides collateral to start over,” said the report. “Gold gives confidence in the power of the central bank’s balance sheet. That gives a safe feeling.”

In today’s economic climate, central bankers see safety as of the utmost importance. For this reason, their love affair with gold will continue.

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