It pays to follow the smart money, and some say you don’t get much smarter than the world’s central bankers. So gold bugs will be interested to learn they have been steady buyers of the yellow metal over the last seven years, taking its official reserve weighting to nearly 13%.
According to a circular published by Amundi Asset Management, this implies a rise in gold reserves from 30,000 to 34,000 tons. Central banks – particularly in emerging market economies – are increasingly leery of the debt-burdened US dollar.
Is gold at the start of a seventh lofty upswing in its fortunes dating from 1871, when Germany took its first steps to link its currency to a gold standard?
But other monetary safe havens are in short supply. The Chinese yuan can’t be viewed as an adequate substitute for the dollar, as yet. The euro is bogged down by economic problems. The Japanese yen is dogged by its central bank’s on-going attempt to re-stimulate the local economy. And forget sterling. Quite apart from Brexit issues, it so happens the Bank of England’s gold weighting is a puny 8.4%.
Amundi says: “Gold is a natural candidate for diversification strategies for central banks away from core currencies.”
OMFIF, a central bank think tank, notes that the world is moving from a dollar-based to a multi-currency reserve system. It says this will be “accompanied by a period of heightened financial uncertainty, supporting central bank demand for gold.”
It views their purchases of gold as the start of a seventh lofty upswing in its fortunes dating from 1871, when Germany took its first steps to link its currency to a gold standard.
Analysts say central banks have been buying to take advantage of a stagnant gold price, which has remained close to the current $1,290 for the last five years. This follows a sharp spike to a record $1,825 during the credit crisis.
A hawkish approach from the Federal Reserve has been a big factor behind price restraint. Investors see little point in buying gold when interest rates are rising. But they like to use it as a hedge when central banks fail to exercise monetary discipline.
Ned Naylor-Leyland, who runs a precious metals fund for Merian Global Investors, says the Fed’s switch to a more dovish policy is significant.
According to his April note: “Gold and silver investors have faced a relentless headwind of hawkish forward guidance from the US Federal Reserve for around six years.
“Finally, this headwind has switched to a tailwind, albeit a light one, and as a result, the opportunity set looks much more interesting for monetary metals.”
Advisers say family offices have been gently increasing their weightings in gold. But support from central banks based in emerging market economies has been more crucial, as US President Trump has turned bellicose and countries have struggled to reboot their economies.
President Erdogan of Turkey expressed his distaste for dollar loans last year, adding: “Gold has never been an instrument of oppression.” Consequently, the Turks have doubled their gold reserves in a year, purchasing 11 tons a month since 2017.
Russia and China have been involved in an oil for gold barter trade: Russia has increased its gold reserves from 457 to 1,890 tonnes over the last ten years, to bolster its currency. Poland and Hungary have reduced the weight of the euro in their reserves, in favour of gold.
Dollar holdings by Chinese investors have been falling, following the onset of a trade dispute with the US and rising debt levels. Its central bank gold reserves have risen from 1,050 to 1,840 tons over three years. Some say its underlying gold stockpile is nearer 3,500 tonnes, acting as a potential prop for the yuan, as its debt also rises.
India’s reserves remain stable at 560 tons, but the country remains fixated on the value of the yellow metal. Whenever markets become volatile, their local media tend to lavish praise on gold-based investment. A report by Bloomberg in April said gold purchases by the Indian reserve bank had begun, and would likely continue.
Amundi has tested out key drivers for the gold price, and concluded they comprise macro-uncertainty, financial volatility, monetary conditions and leverage issues – particularly where US debt is concerned. It has concluded this makes gold a good hedge for monetary reserves, even though its price performance has been flat for a while.
Institutions with high bond weightings can also view gold as a simple hedge against inflation. According to Amundi: “Gold stands out due to its absence of significant correlation with traditional asset classes.”
The World Gold Council, the trade body for the gold industry, has calculated that gold has increased in value by an average of 15% during years whenever inflation hits 3%, or higher.
The price of gold tends to react sharply to a crisis, so investors interested in diversifying into gold might be well advised to follow the money sooner, rather than later.