Renewed Western investment in gold via ETFs has been a key factor in the yellow metals success in 2016. In fact, it has represented a sea change for bullion prices. But another supportive trend is ongoing and shows no signs of stopping: Central banks the world over continue to gobble up gold.
And why wouldnt they? With central banks imposing zero and even negative interest rates, thus sparking a race to the bottom in the value of currencies, gold represents a life preserver for nations worried about their foreign-exchange reserves.
Banks buy up almost 600 tons: Central banks have been net buyers of gold for eight years, with Russia, China, and Kazakhstan among the biggest hoarders, Bloomberg recently reported, citing data from the International Monetary Fund that showed that 590 metric tons of metal were purchased in 2015. These institutions are now on a hot streak unseen since 1965.
We saw this 21st-century trend gain even more steam in the past few months. Kazakhstan bought 100,000 more ounces in January in a purchase that maintained a 40-month streak of additions; its reserves stand at 7.2 million ounces, up from 6.2 million a year ago.
Russia also dipped its toes in, adding about 700,000 ounces in January to bring its holdings to 46.2 million.
China buying privately and officially: China, too, has been announcing purchases since last year. China will continue to take advantage of the current low prices for gold by both adding to official reserves and encouraging private gold purchases by its citizens, Gold Newsletter editor Brien Lundin confirmed to MarketWatch.
Despite occasional lulls in action, central banks bought gold with renewed vigor in the second half of 2015, the World Gold Council reported, citing the impetus to diversify away from the U.S. dollar, and most analysts think that wont be changing anytime soon.
We expect further official purchases to continue to be one of several factors supporting the price of gold in the next few years, Simona Gambarini of Capital Economics told Bloomberg, while George Milling-Stanley of State Street Global Advisors told MarketWatch: I am expecting demand to remain strong, some small seasonal fluctuations aside, because while todays prices are higher than 2015, they are still considerably lower than four or five years ago.
Reinforcing golds credentials: Central-bank buying is just one piece in an ongoing perfect storm for gold in 2016. Official sector purchases, combined with strength in the Asian markets and continuing momentum in the U.S. and Europe, reinforced golds credentials as a portfolio diversifier, a wealth preservation tool and a hedge against a range of risks, the gold councils Alistair Hewitt asserted in conjunction with the release of the WGCs most recent Gold Trends Report.
Renewed ETF inflows in the West, continuing Asian demand, sinking expectations for interest rates across the globe, Chinas slowing economy and growing debt, plummeting oil prices, unexpected weakness in the U.S. dollar its all coming together for gold in 2016, and central-bank purchases will add long-term support.