June 12, 2020

Central Banks Set For Gold Rush Over Financial Crisis Fears


Central bankers look set to go on a gold buying binge this year in the wake of the Covid-19 pandemic, new research shows.

And the leading reason for the likely desire to buy bars of bullion is fear of another financial crisis, according to a recent report from industry group World Gold Council.

Central Banks Doubling Down on Gold

The survey showed that 20% of the banks that responded to the survey said their central bank would likely increase their gold holdings, versus 8% of those responding the same question a year ago. That’s more than double the percentage.

Central Banks have been on something of a buying binge recently and the survey results suggest they could gobble up even more of the yellow metal. Such banks snapped up 650 metric tons of the metal last year, which is worth more than $36 billion at recent the recent price of $1,740 a troy ounce.

Overall, three quarters of all the central banks that responded to the survey thought that global bank gold holdings would increase.

The reasons for believing that this gold rush will occur are legion, but the top two are important.

Higher Risks of A Financial Crisis

The first is fear of a global financial crisis. Six out of 1o of those who responded to the survey said that was a key reason for centrals wanting to hold gold.

The 2007-2009 crisis left many financial assets such as some fixed income securities near worthless, and has rightly left central bankers cautious over what national assets they hold.

The current government efforts to contain the spread of Covid-19 ha shut down entire economies preventing companies from making money and leaving many people without work. That malaise could easily end in a financial crisis if the economy doesn’t get going again quickly.

Negative Interest Rates A Positive for Gold

Jointly topping the list of reasons for adding gold to a country’s national reserves is the “ongoing low to negative yields in advanced economy debt,” the report states. Negative interest rates mean that investors get back less money than the price they pay for the security.

Six out of 10 respondents said that was a key reason for the central banks to add gold.

Increased Central Bank Demand Should Boost Prices

Central banks tend to buy gold when they see the opportunity to obtain the metal at a good price. In practice that means they’ll likely choose to purchase bullion on price dips. That should mean that the market will not see huge falls or plunges over the long term. Or put another way, if you are investing in gold, such as the emtal held in the SPDR Gold Shares (GLD) exchange-traded fund, then the trend should be in your favor.

By Simon Constable

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