Central Banks Are Buying Gold at The Fastest Pace in Ten Years
The comments below are an edited and abridged synopsis of an article by Simon Black
Central banks and foreign governments hold trillions of dollars of reserves, and traditionally they do this by buying US government debt. To big institutions, banks, etc., US government debt is equivalent to cash. They use it as a form of money.
They hold US dollars because that’s the global standard: The US dollar has been the world’s primary international reserve currency for 75 years. The $22-trillion US debt market is the biggest and most liquid market in the world.
But foreign governments are breaking with the tradition of buying Treasuries, and they (along with central banks) have been buying a lot more gold than in previous years.
Net gold purchases in Q1/2019 among foreign governments and central banks was nearly 70% greater than Q1/2018. The Chinese have been stockpiling gold faster than ever, while Chinese ownership of US Treasuries has been gradually declining. Russia, Turkey, Qatar and Colombia are also buyers of gold.
The US federal debt recently reached $22 trillion, and at least $1 trillion is added annually. The US will never again see an annual budget deficit of less than $1 trillion starting in 2021, affecting the ability of the US government to repay its obligations to foreign creditors.
Then there are escalating US trade wars, and it’s easy to see why so many foreign governments and central banks are diversifying out of the dollar and into gold.
Gold, on the other hand, has been a constant of wealth preservation for nearly all of history. Gold is scarce, portable, and it can stand the test of time without corroding. It’s a form of wealth with no counterparty risk, and one that has global demand.
Nearly every asset is at an all-time high. Meanwhile, gold is nearly 50% below its record price. Given what’s happening with central banks, foreign governments, and US debt, it’s clear that demand is rising.
Simultaneously, the supply of gold is under pressure. Large mines have been closing, and large producers haven’t invested in new discoveries, so there is potential for rising gold prices in the future.