Central Banks Are Buying Gold at Rates Not Seen in 50 Years

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Gold’s worth as a hedge against inflation and market decline is well established and while alternatives such as silver and the recent rising palladium have been attractive, they don’t convey the same value to investors, speculators, and central bankers as the yellow metal. With most expecting the U.S. market to begin entering a bearish downturn, it turns out that central bankers have been buying gold in record quantities. According to World Gold Council, central banks have bought more bullion in 2018 than in 48 years, with the last time such quantities were purchased was back in 1971, when the U.S. ended the gold standard.

In total, governments purchased 651.5 tons of gold, which represents a 74 percent increase from the previous year. Overall the World Gold Council estimates that central banks collectively hold around 34,000 tons of gold. Leading the way is Russia, which is trying to move away from relying on dollar reserves. Next up for leading gold purchasers included the Turkish and Kazakhstan central banks. Hungary also made significant purchases this year, citing gold’s role as a hedge against volatility in the international financial system.

“Central banks chose to significantly increase their gold reserves, reinforcing the importance of gold as a reserve asset,” said a report released on Thursday. “Heightened geopolitical and economic uncertainty throughout the year increasingly drove central banks to diversify their reserves and re-focus their attention on the principal objective of investing in safe and liquid assets.”

Central bankers are expected to buy another 600 tons of gold this year, a significant portion of the total 4,345 tons of gold purchased this year. On the other hand, net gold sales from central banks were less than 15 tons, with Germany, Ukraine, Australia accounting for most of the change. These institutions “were not net buyers even a decade ago,” said Juan Carlos Artigas, director of investment research at the WGC, in a phone interview. “As their foreign reserves expand, they are increasingly diversifying away from pure dollar exposure.”

Gold prices have risen around 9 percent in the last three months. Although the yellow metal was overshadowed by surging palladium prices, many expect 2019 to be a year where gold returns to the spotlight. Yesterday, according to Goldman Sachs head of commodity research Jeff Currier, the price of gold could very well shoot over $1,400 per ounce, perhaps going even as high as $1,500.

Besides an expected downturn in the U.S. economy, other reasons contributing to the attractiveness of gold include the growing trade tensions between the United States and China. As the two largest economies in the world, disruptions would affect both countries markets significantly, which would by extension have spillover effects into the world markets. Interestingly enough, neither American nor Chinese central banks were leading the way in gold purchases.

Additionally, the report went on to mention that bar and coin investors were responsible for the 28 percent increase in gold bought that year, while Q3 jewelry demand also grew by 6 percent. Overall, it seems apparent that 2019 is going to be a good year for precious metals as a whole as uncertainty continues to grow.

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