Andy Hagans: This week’s Barron’s points to recent World Gold Council data showing enormous gold purchases by central banks over the past year. These purchases are most likely not a temporary tactical move, but rather a powerful long term trend that will continue for years, if not decades. But wait: don’t the central banks want us “normies” to buy up more equities, invest and spend with record amounts of fiat currency, and heckle the gold bugs for their hilarious foolishness? It appears to be a case of “Do as I say, not a I do.”
Not that we’d suggest you make investment decisions based solely on the words or deeds of a central banker [see: Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later]. This sustained buying by central banks however is no longer a “scoop” for Web journalists such as your humbler writer, but rather a significant, semi-permanent factor in the overall supply-and-demand equation that will determine the price of gold over time.
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Central banks increased their gold hoards by 400 metric tons—each equal to almost 2,205 pounds—in the 12 months through March 31, up from 156 tons during the prior year… The council “is now confident that central banks will continue to buy gold and has added official-sector purchases as a new element of gold demand,” writes Austin Kiddle in a report for London-based bullion dealer Sharps Pixley.
This steady flow of gold into the vaults of central bankers is notable for both the size and consistency of its volume. Indeed, this type of official purchasing last occurred in 1965, when the global monetary landscape hardly resembled the current all-fiat experimental system.
So what does this mean for retail gold investors?
…consistent buying of 10% of annual supply can’t but help keep the price elevated… But that’s only one big change. The second: Short-term speculators have fled the market. Open interest of managed futures funds, considered a good proxy for all speculators, has dropped a staggering 28% since the beginning of September…
Less liquidity will tend to make gold prices more volatile. On the other hand, sustained, large-scale gold purchases by central banks can’t help but build the bull case for all precious metals, and especially gold, over the next decade or two. Many retail investors who can’t justify buying gold as an investment, might consider buying a smaller amount as a hedge [see: What Are The Most Popular Gold Bullion Coins?].
The old maxim “don’t fight the Fed” can apply to many different trading scenarios; the implication that you should be long the yellow metal may simply be a sign of the times.
Related Tickers: SPDR Gold Shares (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), iShares Gold Trust (NYSEARCA:IAU), Sprott Physical Gold Trust (NYSEARCA:PHYS).