Central Banks Haven’t Bought This Much Gold Since Nixon

Something big is happening in the gold market right now, and nowhere is that more apparent than in central banks of emerging economies. Last year was a watershed in the size of official gold purchases, as banks added an incredible 651.5 tonnes (worth some $27.7 billion) to their holdings, according to the World Gold Council (WGC). Not only is this a remarkable 74 percent change from 2017, but it’s also the most on record going back to 1971, when President Richard Nixon brought a formal end to the gold standard. In the final quarter of 2018 alone, central banks purchased as much as 195 tonnes, the most for any quarter on record, according to leading precious metal research firm GFMS.

As I’ve shared with you before, central banks have been net buyers of the yellow metal since 2010 in an effort to diversify their reserves away from the U.S. dollar. This very week, I had the opportunity to discuss the issue with SmallCapPower’s Vasudha Sharma. You can watch the conversation by clicking here.

Most Western nations already have a comfortable weighting in gold relative to their total reserves, so the demand is almost strictly from emerging markets. Among the biggest purchasers last year were Russia, Turkey and Kazakhstan, and we also saw China add to its holdings for the first time since 2016. Meanwhile, Hungary, Poland, India and a number of other countries took deliveries for the first time this century.

Central Banks Recognize Gold as an Effective Diversifier and Store of Value

With gold representing a whopping 74 percent of U.S. reserves, the Federal Reserve has historically had the largest position among global central banks. (Venezuela’s weighting, at 76 percent, has lately roared past the U.S., but that’s thanks solely to hyperinflation and its rapidly deteriorating economy. I’ll have more to say on Venezuela later.)

Other countries have a lot of catching up to do—i.e., gold buying—to get to the same level of diversification. Russia, for instance, has the fifth most gold in the world at 2,066.2 tonnes, but this amount represents only 17.6 percent of its total reserves. In sixth place is China, whose holdings (a reported 1,842.6 tonnes) represent a very small 2.3 percent of reserves.

Below you can see Russia’s ongoing strategy of “de-dollarization.” To date, the Eastern European country has liquidated nearly its entire position in U.S. Treasuries to fund its rotation into gold. According to the WGC, Russia bought 274.3 tonnes in 2018, its greatest amount on record, and the fourth consecutive year of purchases above 200 tonnes.

Gold Is the Only Thing Left of Value in Venezuela

Gold made even more headlines this week as it relates to Venezuela. The beleaguered South American country, as you probably know, is in the midst of a potential transfer of power, from current president and dictator Nicolas Maduro to the more centrist Juan Guaido, whom the U.S., European Union and other world governments have recognized as the de facto head of state.

Since the U.S. and other countries have imposed heavy sanctions on Venezuela and its oil industry, the cash-strapped country has had to rely on its gold holdings to make international bond payments, mostly to Russia and China. But the days of Maduro’s plundering of Venezuela’s hard currency might be numbered, and not just because he could be removed from power soon.

This week Guaido sent a letter to U.K. Prime Minister Theresa May and the Bank of England (BoE), urging them not to send $1.2 billion from any sale of Venezuela’s gold reserves—held in the BoE’s vaults—to Maduro’s “illegitimate and kleptocratic regime,” according to the Financial Times. “Maduro has stolen a huge quantity of state assets,” including Venezuelan gold, a part of the letter reads. “There is no doubt that he will, if allowed, also steal the assets held by the Bank of England, which rightly ought to be saved to support the recovery of Venezuela.” The bank has honored Guaido’s request and is blocking Maduro’s efforts to sell the metal.

Later in the week, a Russian Boeing 777 allegedly landed in the capital city of Caracas and was loaded up with as much as 20 tonnes of Venezuelan gold, according to Bloomberg. It was later reported that the jet, for reasons unknown, left Caracas without the gold payment. There are new reports, however, also by Bloomberg, that another aircraft, this one from the United Arab Emirates (UAE), has landed in the country and is awaiting delivery of the gold instead.

These incidents are certainly dramatic, and I’m eager to see how they play out, but I think the key takeaway is that gold is an exceptional store of value. It’s the only asset of any value to which a socialist autocrat like Maduro still has access. The bolivar is worthless, and the country’s once powerful and influential oil industry is fading fast. Without gold, Maduro is powerless.

Four Straight Months of Gains. What’s Gold’s Next Move?

The gold rally that began late last year, when equities turned rocky, continued into the new year as the historic U.S. government shutdown gripped investors, and signs that Fed Chair Jerome Powell was set to pause monetary tightening intensified. For the fourth straight month in January, both the price of gold and gold mining stocks posted strong gains. Before then, the price of gold was down for six straight months, a losing streak we hadn’t seen in 40 years, when the yellow metal fell each month from December 1988 to May 1989.

The yellow metal ended last month at a nine-month high, and with the U.S. dollar expected to lose momentum on higher deficit spending, we could see prices surge to as high as $1,400 or even $1,500 an ounce this year.

I’m not alone in my bullishness. Billionaire Sam Zell, creator of the real estate investment trust (REIT), bought gold for the first time in his life, citing the fact that supply is shrinking.

And Mad Money’s Jim Cramer also came out strongly in favor of the yellow metal this week.

“We are big gold believers here,” Cramer commented. “Now gold is at $1,300, we think gold is going to $1,400, $1,500. We suggest that everybody have a little bit of gold in their portfolio.”

I second Cramer’s suggestion. My recommendation has always been a 10 percent weighting in gold, with 5 percent in bullion and jewelry, the other 5 percent in high-quality gold mining stocks and well managed gold mutual funds and ETFs.

Have a great Super Bowl weekend!

 

Gold Market

This week spot gold closed at $1,317.65, up $14.50 per ounce, or 1.11 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 6.62 percent. The S&P/TSX Venture Index was up 3.03 percent. The U.S. Trade-Weighted Dollar fell 0.19 percent.

Date Event Survey Actual Prior
Jan-28 Hong Kong Exports YoY -1.7% -5.8% -0.8%
Jan-29 Conf. Board Consumer Confidence 124.0 120.2 126.6
Jan-30 Germany CPI YoY 1.6% 1.4% 1.7%
Jan-30 ADP Employment Change 181k 213k 263k
Jan-30 FOMC Rate Decision (Upper Bound) 2.50% 2.50% 2.50%
Jan-31 Initial Jobless Claims 215k 253k 200k
Jan-31 New Home Sales 570k 657k 562k
Jan-31 Caixin China PMI Mfg 49.6 48.3 49.7
Feb-1 Eurozone CPI Core YoY 1.0% 1.1% 1.0%
Feb-1 Change in Nonfarm Payrolls 165k 304k 222k
Feb-1 ISM Manufacturing 54.0 56.6 54.3
Feb-2 Durable Goods Orders 1.7% 0.8%
Feb-4-Feb-8 GDP Annualized QoQ 2.6% 3.4%
Feb-5-Feb-15 Housing Starts 1253k 1256k
Feb-5-Feb-15 New Home Sales 575k 657k
Feb-5-Feb-15 Durable Goods Orders Preliminary 1.7%
Feb-5-Feb-15 Durable Goods Orders Final
Feb-7 Initial Jobless Claims 220k 253k

Strengths

  • The best performing metal this week was gold, up 1.11 percent. Gold traders were bullish on the outlook for a 12th straight week and the most bullish in five weeks, according to the weekly Bloomberg survey. The yellow metal is up more than 2 percent for the year and is set for a fourth monthly gain. This comes as the dollar is down for a third month. Gold saw a boost in particular on Wednesday when the Federal Reserve signaled that it’s moving away from its bias toward higher U.S. borrowing costs, which boosts the appeal of gold.

  • Demand for gold in China, the world’s number one consumer, rose 5.7 percent in 2018 to 1,151 tonnes, says the China Gold Association. Jewelry consumption was also up 5.7 percent, while bar demand was up 3.2 percent. China, also the world’s top gold miner, saw output fall 5.9 percent to 401 tonnes last year. According to the World Gold Council (WGC), demand will remain steady in 2019, even as there are signs of slowing economic growth and political uncertainties.
  • U.S. Mint data showed this week that gold coin sales rose to 65,000 ounces in January, the most in two years. This comes after several months of “horribly lacking” sales, says Peter Thomas at metals broker Zaner Group. Net purchases of gold holdings in ETFs are now at 2.01 million ounces for the year, according to data compiled by Bloomberg. For the first time in what seems like forever, ETFs also added silver to their holdings. On Thursday alone there were 1.18 million troy ounces added – the largest one-day increase since November 13.

Weaknesses

  • The worst performing metal this week was palladium, down 0.66 percent as hedge funds cut their net long position to the lowest in six weeks. U.S. pending home sales fell in December for the third straight month. This is another sign that the housing market is weakening amid elevated property prices and higher borrowing costs, writes Bloomberg. GFMS wrote in a report this week that it sees gold at $1,292 an ounce in 2019, compared to current prices sitting around $1,309. They write that demand for defensive assets such as gold is likely to pick up on deepening economic concerns, but that physical markets are likely to be subdued because of high price levels.
  • Venezuela is preparing to send 15 metric tonnes of its central bank reserves to the UAE, as the country’s economy struggles and President Nicolas Maduro faces opposition from within and abroad to step down as leader. U.S. National Security Advisor John Bolton wrote in a tweet on Wednesday: “My advice to bankers, brokers, traders, facilitators, and other businesses: don’t deal in gold, oil, or other Venezuelan commodities being stolen from the Venezuelan people by the Maduro mafia.”
  • After several weeks of increasing gold reserves week-on-week, data from the Turkish central bank showed that reserves fell $555 million from the prior week. As of January 25, Turkey’s holdings were worth $19.9 billion, down 22 percent year-over-year.

Opportunities

  • The Federal Open Market Committee (FOMC) released several decisions this week that could be positive for gold. As summarized by David Doyle at Macquarie Group, those changes are: being patient in market future adjustments and removing forward guidance on further rate hikes. The balance sheet normalization path is also flexible, and the Fed is willing to use the balance sheet if economic conditions warrant it. Brown Brother Harriman wrote that the Fed sent a clear signal to buy equities and sell the dollar, which is positive for gold.
  • Central banks globally are buying gold at the fastest rate since 1971 when the gold standard was ended in the United States. Governments purchased 651.5 tonnes of gold in 2018, which is a 74 percent increase from the previous year. Metals Focus forecasts that these central banks might purchase another 600 tonnes in 2019. Russia and Turkey were among the largest buyers last year. Russia bought 274.3 tonnes of the yellow metal in an effort to de-dollarize its reserves. Gold consumption in India could be on the mend in 2019, as it is an election year, which could boost spending in the world’s second largest gold consuming country, according to the WGC.
  • Silver could see a boost from increased solar power demand in sub-Saharan Africa. Bloomberg’s Takehiro Kawahara writes that “favorable economics and demand from commercial and industrial clients, largely mining companies and manufacturers, means more solar sales are being made directly to businesses.” Two gold miners rethought their strategies and shuttered projects that could have been non-economical. Iamgold shelved its Cote project construction while Eldorado suspended the advancement of a mill project in Turkey. These decisions to shutter potentially marginal expansion projects were immediately rewarded with significant share price gains for the two companies making good capital allocation decisions.

Threats

  • The U.S. Treasury Department announced on Wednesday that it plans to issue another record-breaking amount of debt, creating growing criticism and questioning of whether President Donald Trump’s tax cuts will pay for themselves. The Treasury is raising its long-term debt issuance at its quarterly refunding auctions to $84 billion, which is $1 billion more than three months ago, writes Bloomberg. Debt sales have already risen past those last seen after the worst economic crisis since the Great Depression.
  • In more Venezuela gold news, a Russian plane arrived in Caracas on Wednesday to take away 20 tonnes of gold, but then the plane left the country without the gold. The Maduro regime then halted its plans to ship the gold out of the country after the U.S. issued a warning for other countries not to deal with Venezuela’s gold.
  • Juan Guaido, recognized by many nations as Venezuela’s true leader, wrote in a letter to the U.K. asking the Bank of England to not allow Maduro access to $1.2 billion in Venezuelan gold reserves held in the country. There is a risk, however, that if Guaido gains power, he could turn around and sell the gold, too.

 

Index Summary

  • The major market indices finished up this week. The Dow Jones Industrial Average gained 1.32 percent. The S&P 500 Stock Index rose 1.55 percent, while the Nasdaq Composite climbed 1.38 percent. The Russell 2000 small capitalization index gained 1.29 percent this week.
  • The Hang Seng Composite gained 1.82 percent this week; while Taiwan was down slightly 0.37 percent and the KOSPI rose 1.18 percent.
  • The 10-year Treasury bond yield fell 7 basis points to 2.687 percent.

 

Read the rest of the article at http://www.usfunds.com/investor-library/investor-alert/central-banks-havent-bought-this-much-gold-since-nixon-was-president/

 

Please note: The articles listed below contain historical material. The data provided was current at the time of publication. For current information regarding any of the funds mentioned in these presentations, please visit the appropriate fund performance page.

February 1, 2019

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors