Central Banks Are Buying Gold: Should You Follow Suit?
Over the last six years, a surprising economic shift has been quietly taking place in the gold markets. All over the world large central banks have been either buying up stocks of physical gold bullion or postponing sales of the metal, aiming to raise their gold reserves. According to the Official Monetary Financial Institutions Forum, a financial think-tank, since the 2008 financial crisis these institutions may have bought as much as 2,800 tonnes of the precious metal. (Via Marketplace.org)
According to David Marsh, OMFIF’s director, this is in fact the longest spell of gold-buying by central financial institutions since the post-war recovery period, when many nations were still on the gold standard. Since then, particularly during the late 1990s, many central banks sold off their gold (including the Bank of England, which sold 395 tonnes of gold for around $275.60 per troy ounce). With the climb in prices following the 2008 financial crisis (gold reached between $1100 and $1600 per ounce) many of these central banks lost a huge amount of money. Now they’re halting all further gold sales, and some (particularly the Central Bank of Russia and the People’s Bank of China) are actively buying more gold to add to their reserves.
But Why?
These banks have been moving away from gold as a basis for currencies for decades, since the Nixon Shock in 1971 finally took the US off the gold standard. Why are they now buying it in vast quantities?
The OMFIF believes that the gold reserves are a psychological prop, citing gold’s durability and stability. Physical gold doesn’t go bust, supplies are unlikely to inflate, and as such the metal has a permanence that makes it attractive in times of change. It’s the bankers’ ‘dirty little secret’ – they are not confident in their position or institutions, and are seeking the superficial comfort of a solid underpinning to their finances.
In addition, most countries around the world are net purchasers or holders of gold, as many choose to have a supply of the precious metal as a hedge against economic downturns. This means that a large portion of the world’s total gold reserves are already in national reserves and as such that gold is becoming harder to acquire. Central banks are thus limited to purchasing gold from mines, reducing the supply of gold while demand increases. As such the gold price is looking set to rise, as happened dramatically in 2008.
Private Investment
Furthermore, this news has important consequences for private investors, as I explained in an article on Marketplace.org:
“It’s ironic, it’s confusing, it’s conflicting. On the one hand they’re printing paper, they’re devaluing currency. On the other hand, they’re purchasing physical gold to maintain their currency’s purchasing power.”
While this seems illogical, I believe that it presents an important opportunity for private investors to invest in physical gold. We’ve got pretty much every single central bank in the world, either holding or purchasing physical gold. I would say if it’s good enough for them, it’s good enough for us.
Indeed, gold may pay out more to private investors than to the banks that are hoarding it. David Marsh warns that although 2,800 tonnes of gold is a significant amount, it’s not nearly enough to cover the paper liabilities now floating around the globe. For private investors, however, physical gold investment can be lucrative, given the steady rise in the gold price since the financial crisis. While gold purchasing is an unsustainable psychological prop for the banks, a diversification into physical gold investment provides a safe haven for private investors that will be useful in the potentially turbulent economic times ahead.
The Pure Gold Company supplies fully allocated, tax-efficient physical gold for investment purposes, as well as physical silver and gold investments tailored for pensions and SIPPs. Call today to arrange a consultation to find out what kind of gold investment is right for you. The Pure Gold Company can also provide fully insured and tracked delivery to a location of your choosing, and is able to arrange segregated storage in a secure facility approved by the London Market Bullion Association.
