Central Banks Could Be the Biggest Catalyst for Higher Gold Prices Lombardi Letter 2019-08-01 07:35:39 gold prices gold price central banks Central banks have been active in the gold market, and their activity could remain strong in 2019. This is bullish for gold prices. Here’s what investors should know. Commodities,Gold

Central Banks Could Be the Biggest Catalyst for Higher Gold Prices

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The Central Banks Could Cause Gold Prices to Go Higher Mahawanjam

Here’s Why Gold Prices Could Reach $2,000 an Ounce

Central banks could send gold prices to $2,000/ounce and beyond. Don’t ignore central banks if you are trying to figure out where the price of the yellow precious metal could go next.

Imagine this.


You are a governor of a central bank in an emerging economy. You know your foreign exchange reserves are filled with U.S. dollars and you know that the value of the U.S. dollar is expected to be volatile.

Keep in mind, your duty as a central banker is to preserve the wealth of your respective nation.

What will you do?

Buy stocks? They are much more volatile than currencies. Buying stocks in your foreign exchange reserves could essentially mean buying more stress. Mind you, by buying stocks, you will only stretch valuations. If you ever decide to get out, you will hurt the entire stock market and it could take a massive toll on investor sentiment.

Buy other major currencies? As it stands, major currencies around the globe are facing severe headwinds. The euro is weak, the British pound is tumbling, the Canadian dollar isn’t doing too much, and so on and so forth. Buying other major currencies might not be beneficial.

This is a bold statement, but one worth making: the most sensible thing a central bank could do at the moment to reduce uncertainty in its reserves would be to buy gold.

Why? Gold is a global currency and it is also a great hedge against currency devaluation.

These Central Banks Are Already Buying Gold

In case you didn’t know, central banks from emerging economies are working very hard to diversify their reserves already.

Over the past few years, central banks from countries like Russia and China have bought a lot of gold. India has been dipping its toes into the gold market as well. Other small central banks have also bought gold.

In 2018, these banks set records when it comes to gold purchases. Central banks’ gold-buying spree in 2018 was the biggest in several decades.

And they could continue to buy at that pace.

According to the 2019 Central Bank Gold Reserve Survey conducted by the World Gold Council, 11% of emerging-market and developing-economy central banks that were surveyed said they plan to increase their gold reserves over the next year. In 2018, a similar percentage of central banks added gold to their reserves. (Source: “2019 Central Bank Gold Reserve Survey,” World Gold Council, July 18, 2019.)

Gold Price Outlook: Don’t Rule Out $2,000-an-Ounce Gold Yet

Dear reader, I will not be shocked if central banks’ gold demand is similar in 2019 to what it was in 2018—if not higher.

In the first quarter of 2019, these banks purchased 145.5 tonnes of the yellow metal. This was 68% higher than in the same period a year ago. (Source: “Gold Demand Trends Q1 2019,” World Gold Council, May 2, 2019.)

I fully expect their gold purchases to continue; they don’t have enough gold to fully hedge their reserves just yet.

Mind you, central banks are big buyers and the gold market is fairly small. I have compared central banks to an elephant trying step into a pool. No matter what they do, they will cause ripples across the gold market and send gold prices higher.

How high could central banks send gold prices? When I look at the central banks’ actions, a $2,000 price target seems very possible.

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