Big Gold Purchases By Central Banks: Bad News for U.S. Dollar?

Central Banks Buying Gold - Bad News for U.S. Dollar?

According to data published by the World Gold Council, global central banks haven begun adding to their gold stockpiles. In February, the following nations added to their reserves:

  • India (11.2 tons)
  • Uzbekistan (7.2t)
  • Kazakhstan (1.6t)
  • Colombia (0.5t) 

The only notable sale of central bank gold reserves was from Turkey at 11.7 tons.

Why did Turkey’s central bank sell gold?

Nations hold gold reserves as a sort of collateral against their sovereign currency. Turkey’s currency, the lira, had a horrible day on March 22 and lost 20% of its value. In response, Turkish President Recep Tayyip Erdogan made an appeal:

I ask my citizens to invest their foreign currencies and gold in various financial institutions and bring [those assets] into the economy and production.

via BalkanInsight

Put simply: if his people listened to Erdogan’s plea and swapped all their U.S. dollars and euros and precious metals for lira, demand for lira would increase. And therefore prices would increase. It’s reasonable to assume the Turkish central bank sold gold in order to buy lira in an effort to prop up the beleaguered currency.

Note that even after this sale, Turkey has a respectable 716 tons of gold reserves.

What other central banks are buying gold?

More recently, central bank gold purchases have been in the news.

This month, Hungary announced its intention to triple its gold reserves “to help stabilise the economy amid the COVID-19 pandemic, inflation risks and rising debt.”

Back in March, Poland decided to buy 100 tons of gold.

The Reuters article even hints at a possible explanation…

Over the last decade central banks, particularly in Eastern Europe, the Middle East and Asia, have stepped up purchases of gold, often seeing it as a way to reduce reliance on assets such as the U.S. dollar.

Reuters

Is central bank gold buying a bad sign for the dollar?

Not necessarily. Most central banks around the world hold a combination of foreign exchange reserves (a collection of the world’s most-used and/or most-stable currencies) in bonds as well as gold or other precious metals.

So, in a sense, any government that issues bonds is competing for central bank customers. For the most part, only the most common currencies are considered useful as foreign exchange reserves. According to the IMF, the top five are:

  • U.S. dollar
  • euro
  • China’s renminbi
  • Japan’s yen
  • U.K.’s pounds sterling

So anytime the U.S. Federal Reserve, the Bundesbank or the Bank of England issues a bond (a promise to pay later for cash now, or an IOU), there are other global central banks who are potential customers. Along with them, what you might think of as the “traditional” customers for bonds like pension funds, insurance companies, individual savers, etc. also want bonds. More customers means more demand, and more demand means higher prices.

But what if some of that central bank demand is diverted out of bonds, into gold?

That means a diminished demand for bonds. That means a slight upward pressure on the interest rate issuing banks must offer to attract buyers. Which makes deficit spending more expensive. Sovereign bonds can also lose value to inflation.

Further, as mentioned in the Reuters article, gold isn’t subject to counterparty risk. There’s always the chance, however small, that a nation might choose to stop paying its bond-holders. (This is called a default, or a sovereign debt crisis, and they happen fairly regularly.)

There’s zero chance of physical gold defaulting. Once those gold bars are locked up in a nation’s central bank vaults, it serves as a permanent store of value.

In an important sense, when a central bank chooses to add to their gold reserves, the decision says, “We’re diversifying our country’s savings out of currencies we don’t control, into an asset class that we can trust.”

“Gold as an Inflation Hedge” to Push Gold Price to $1,850: Scotiabank

Gold as an Inflation Hedge to Push Gold Price to $1,850: Scotiabank

In their monthly commodity report, Scotiabank went over their expectations for gold and silver in the face of what they refer to as the best economic growth in 40 years. This, of course, refers to the bank’s forecasts that the U.S. economy will expand by 6.2% this year and 4.4% in 2022.

Economic Forces Driving Gold Higher

These figures would normally be staggering, yet context is very much a key factor in this scenario. A growth of this magnitude has only been made possible in the form of a rebound from what most agreed was the biggest blow to the U.S. economy in the last century. Unsurprisingly, investors have been quick to adopt positive sentiment and have pushed both bond yields and the U.S. dollar higher, creating tremendous short-term pressure for gold.

Nonetheless, as gold price bounced back-and-forth between the $1,700 level, it pays to reassess the foundations on which the rebound, as well as the supposed growth, lie. To facilitate a recovery, the Federal Reserve had to commit to a zero-interest-rate policy along with pumping trillions of dollars into the economy. How soon and in what way this prolonged loose monetary policy will affect the nation has been the subject of plenty of speculation, but inflation seems to be on the mind of even the most optimistic market participant.

The newly-printed dollars have to go somewhere and wind up debasing the currency, and many economists believe that the effect could be felt the hardest in the form of a sudden inflationary spike. The general consensus is that prices for all base goods will see a considerable rise over the next five years. (In other words, inflation.)

$1,850 Average Gold Price per Ounce in 2021

In good part because of this, Scotiabank’s team is sticking to the average $1,850 gold price forecast for both 2021 and 2022. While the bank projects strong economic growth around the world, the ongoing negative developments surrounding the health crisis leave much to be desired in terms of certainty. It also pays to notice that countries around the world were reporting stagnant or contracting growth ahead of the crisis, with Germany’s manufacturing sector being just one example.

Regardless of how global growth unfolds over the next two years, Scotiabank sees silver as an investment that is poised to appreciate even more than gold.

Scotiabank’s Case for Silver

In the event of another flare-up, silver is well-positioned for a flock to safe-haven assets such as the one seen last year.

While manufacturing activity was contracting in 2019, industrial demand for silver was growing due to a heavy push for green energy, and it is also something that the Biden administration has emphasized. Silver is a critical component for solar panels, and also has eco-friendly uses in high-capacity batteries, water purification and electronics manufacture.

If the manufacturing sector indeed recovers as sharply as Scotiabank forecasts, silver stands to gain significant support so long as nations’ economies grow, and even more so as the developed world pivots toward a lower-carbon footprint.

A Stagflation Flashback Ahead? Keep an Eye on Gold

Stagflation flashback ahead? Keep an eye on gold

Ever since gold’s correction from August’s high, market participants have been watching closely as to whether we will bear witness to a similar scenario to the one between 1971 and 1980. Back then, economic conditions eerily mimicked what seems to be on the horizon today: a stagflation environment propelled by low growth, rising prices and excessive interest rates.

That bout of stagflation came, most would agree, as the result of the U.S. dollar being untethered from gold. The metal subsequently jumped from its $35 tether valuation to $200, corrected to $100 and then soared far above to reach $850 within a few years’ time. What might we guess, based on this historic pattern?

Today there’s no tether-based gold valuation. Recent calls for a return to a gold standard or a similar tangible backing of the dollar from various corners have very much driven that point across.

The Federal Reserve maintains inflation is running well below its stated annual target of “around 2% on average,” and that they know this because their measurements are accurate. We are forced to wonder how that’s possible, given the historic amount of money printing. Even such a luminary as former U.S. Treasury Secretary Lawrence Summers fears the nation could be facing its biggest inflationary problem in 40 years.

Wealth preservation and inflation concerns

Reports from various government mints show that precious metals purchases have maintained their record-shattering pace over the past few months ‑ regardless of fluctuations in price. In other words, buyers seem very much concerned about long-term wealth preservation and aren’t deterred by momentary corrections.

And it appears they have every right to be.

With the debt bubble ballooning and government deficit perpetually increasing, many wonder how and when the Fed will choose to address these issues. In the absence of a debt default (which is viewed as highly unlikely), the remaining options boil down to spending cuts, tax increases or allowing inflation to run its course.

Spending cuts mean austerity, less services for taxpayers, less money for special interests. That’s simply not a politically tenable path.

Tax increases could raise funds for federal coffers. On the other hand, taxing the wealthy all too often results in nothing more than emigration to more wealth-friendly nations. To raise taxes on a thing is to risk driving it away.

That leaves us with inflation, which seems to be the Fed’s favored option. And it is almost certainly already underway.

Inflation destroys debts

The Fed’s comments indicate the official sector has braced for a public response over claims they wouldn’t oppose inflation running past the desired target. Given how the Fed measures inflation, it seems citizens are especially vulnerable to being caught by it off-guard in the form of a sudden spike in consumer prices.

On this topic, Indonesia’s 30% increase in tofu prices since December, Russia’s 60% rise in sugar prices over the last year and a 20% spike in grain prices are worrying examples of how consumer goods can shoot up both suddenly and unevenly.

The market response to a high-inflation environment is fairly well laid-out. An initial boost of the stock and real estate sectors is followed by erosion of purchasing power, together with excessive monetary demand, a loss of confidence in fiat currencies and an ongoing increase in money printing.

Look familiar? Initial boost in stock and real estate? Check. Erosion of purchasing power? See food inflation data above (or recent stories about manufacturing concerns over steel or lumber prices). Excessive monetary demand? Yes in capitals; businesses are issuing new debt at a record page. Might the boom in bitcoin and other digital currencies have something to do with the loss of confidence in money backed by nothing but faith? Increased money printing: yes, again at record levels.

What does the future hold?

It should come as no surprise that the public have flocked to precious metals, with the latest social-media driven rush to silver being perhaps the first of many warnings.

When inflation does hit in such a way that not even distorted CPI can disguise it, the small subset of the public who have invested in gold and silver have managed to preserve the majority of their wealth. The rest scrambled to secure any sort of hard asset with their rapidly-depreciating currency.

The Silver Frenzy Is Over, But Silver Has More Supporters Than Ever

The Silver Frenzy Is Over, But Silver Has More Supporters Than Ever

Reuters reports that February’s social-media driven rush to the paper silver market might not have lived up to expectations, but it nonetheless shone a light on a metal that has no shortage of tailwinds going for it. The frenzied army of day traders who hoped to bring silver’s price to three or four-digit figures came and went. But some of them have stuck around, bolstering a growing and diverse congregation of silver investors.

Who’s holding silver now?

New fans of silver include retail buyers who see plenty of appeal in the metal past any short-term buy signals. Holdings in the largest silver fund rose by 45% last year to reach more than 1 billion ounces, the highest amount on record. Individual investors and money managers alike were quick to jump on the silver wagon amid unprecedented panic and concerns over currency debasement after a historic monetary stimulus.

Most of these investors have held onto their silver, joining the ranks of Wall Street giants who have been stockpiling silver due to its abundant uses. Goldman Sachs’ hoard has continuously emerged as the most prominent one, with its analysts calling it their favorite metal for both economic and industrial reasons.

Where are silver prices going?

While silver hit an 11-year low of $11.62 as industrial activity slowed to a crawl in March, it appears the course is being reversed. Besides the recovery from the manufacturing sector, silver’s industrial case continues to be bolstered by a push towards green infrastructure. While this might not do much for silver’s outlook in the short-term, both the U.S. and China have committed to reaching carbon neutrality over the next few decades, with the Asian nation sporting a five-year green infrastructure plan that has captured the attention of many.

This leaves short-term price predictions which could swing either way, but are nonetheless very much aligned in silver’s favor at the moment. The Silver Institute forecasts an average silver price of $30 for 2021, just short of its current $28 valuation. Given silver’s known volatility and taking into account that the year has only begun, this could very well translate to some explosive price action to the upside over the coming quarters.

The latest Commitments of Traders Report shows that money managers, by and large, remain bullish on silver’s prospects. For the most part, retail investors are quick to buy into silver dips and far more reluctant to take profits. Combined with the influx of new investors and lots of favor from old ones, February’s frenzy may turn out to be the first of many interesting developments in the silver market.

Silver Demand at 8-Year High; Solar Industry Expects 11% Price Gain in 2021

Silver Demand at 8-Year High; Solar Industry Expects 11 Percent Price Gain in 2021

With so much focus on the surge in investment demand for silver and the surrounding bullion shortages, it’s easy to forget that the metal remains a key component of a rapidly-expanding industry. A recent forecast by The Silver Institute placed the average annual target for silver at $30, a 46% climb compared to last year that will be driven not only by investment and jewelry demand but also the growth of the photovoltaics (PV) industry.

In a statement, the institute said that this year’s demand for silver is expected to reach 1.025 billion ounces, and that the metal will therefore shed any losses sustained last year. Talking to the magazine, The Silver Institute’s executive director Michael DiRienzo expanded upon some of the industry’s underpinnings, along with what it would take for the sector to create a supply glut similar to the one happening in the investment sphere.

How solar panel “thrifting” influences demand

The institute, as well as other experts in the field, have continuously singled out thrifting as one of the most important parts of industrial silver demand. The process refers to manufacturers’ efforts to reduce the amount of silver necessary in each solar cell due to the metal’s high price. This form of cost-cutting has brought the silver contents in an individual solar cell to an average of 111mg in 2019, and The Silver Institute expects the trend to lower the per-cell silver content to 80mg by 2030.

However, it has been repeatedly stated that thrifting is a process which peaked out in 2016, and that the sector can only spread the silver in a given cell so thin. On the flip side, DiRienzo noted that a growing number of countries are turning to solar panels, adding to a broader bid by global governments to look for green energy solutions.

With current technologies, silver accounts for about 6% of the total cost to produce a photovoltaic panel.

Despite thrifting, solar demand for silver grows

Keeping this in mind, DiRienzo said that the institute expects the PV industry to purchase 105 million ounces of silver this year, a significant increase compared to the 88 million ounces last year and 93 million ounces in 2019. As for price changes, DiRienzo said that silver could once again outperform gold due to its smaller market and higher volatility. The director went on to say that an average annual price of $40, or peak prices of $45, would create a problematic environment where the silver industry begins facing supply issues, especially due to the absence of further cost-cutting methods.

This is especially important considering the slow decline in global silver production over the last four years. Because nearly 75% of newly-mined silver comes from projects where it’s a by-product of the primary metal being mined (usually copper, lead, or zinc), silver supply isn’t elastic. If demand does reach a critical level, supply can’t be expected to increase quickly or at an equivalent magnitude.

The End of the Gold Standard and the Explosion of Federal Debt

The End of the Gold Standard and the Explosion of Federal Debt

2021 marks the 50th anniversary of the U.S. dollar going off the gold standard. This is a timely if sordid occasion. In response to the crisis, last year saw the Federal Reserve issue an unprecedented multi-trillion dollar stimulus in what seems to be a precursor of things to come. The influx of free-floating money has brought on inflationary concerns ranging from those depicting a late 1970s scenario all the way to a Weimar worst-case.

The separation of gold from the dollar in 1971 did much for both in the decades to come. The loss of the dollar’s purchasing power was expedited in force, and governments learned that they could respond to any crisis or even need by simply printing more money. Officials were also far less compelled to think about the consequences of government spending, and the comparison of federal debt now versus 70 years ago shows exactly that.

Federal debt growth over the last 60 years

In 1960, the federal debt amounted to just over half the size of the U.S. economy. Today, it sits at 130% of the U.S. economy, paired with a $28 trillion national debt figure that seemed unfathomable decades prior. The rise of the Modern Monetary Theory (MMT) shows just how unfathomable the debt is, along with any solution to it. Proponents of MMT say that governments should freely print more money whenever needed, and in many ways, it’s difficult to argue that MMT hasn’t already been implemented.

The M1 money supply, or the amount of currently available liquidity, rose in December by a record 67% year-on-year. And with plans for a $1.9 trillion stimulus package to be issued in the short-term, the path to inflation appears to be unavoidable.

Gold as a store of value

Gold’s tale is one of sharp contrast. The metal became available for purchase and trading in the U.S. in 1974, and by 1980, an ounce of gold was worth $850, representing a 385% increase. Many are quick to point out that this was a high inflation period for the U.S., yet gold’s value over the coming years and decades continued to grow exponentially whereas the dollar eroded.

Today’s gold price of above $1,800 attests to that, as the metal has posted a compound annual growth rate (CAGR) of about 8%. Its scarcity, liquidity, popularity and unquestionable value have made the 50-year anniversary a particularly notable one. At no point over the past 50 years were calls for a return to the gold standard louder, as it becomes clear that faith and reassurances won’t be enough to back the dollar for much longer.

How much longer can record debt last?

Whether the Federal Reserve and the Treasury Department are considering any sort of return to money backed by gold is a matter of hot debate. The enormous difficulty of returning to the gold standard stems from, and highlights, the sheer amount of money that has been printed in the meantime.

With official gold reserves at around 261 million ounces or $493 billion, the government would need to fix the price of an ounce of gold to about $100,000 to keep the economy afloat. However implausible a return to the gold standard might seem, Americans who own gold can get just as much reassurance in their investment from the inflationary policies of MMT.

In a clear example of cause and effect, each newly-printed U.S. dollar bill makes gold more valuable and the greenback less valuable. Gold’s value increases most visibly when compared to the decreasing value of the dollar.

2021: Deficits, Inflation, Overvalued Stocks Drive Gold Higher

In 2021 Deficits, Inflation, Overvalued Stocks Drive Gold Higher

The factors that drove gold to a new all-time high of $2,067 last year are well-known. The unprecedented amount of global panic caused a flock towards precious metals, one that had just as much to do with reactionary government policies as the crisis itself. Over the span of 12 months, gold gained around 25% while silver topped a seven-year high and became the main item on many a watchlist. In their Gold Outlook report for 2021, the World Gold Council (WGC) stated that it expects gold to post an almost as strong of a performance this year due to a combination of new and existing tailwinds.

Inflated stock valuations are a boon for gold

According to the report, the stock market is again shaping up to be a massive red flag. Long before the crisis hit, many experts were warning that equities’ valuations are overblown and that the longest bull run in the market’s history is slated for a correction, if not an altogether crash. The WGC points out that the S&P 500 price-to-sales ratio is at historic highs, yet also likely to expand further.

Near-zero bond yields send investors to gold as a safe haven

With the effective elimination of most sovereign bonds from portfolios, investors will now look to take on a more risk-on approach in search of gains, said the WGC. The renewed appetite for risk will also be powered by optimism in regards to a rapid global economic recovery after one of the worst slowdowns over the past century. The increased reliance on dubiously-valued stocks is likely to bring on strong pullbacks and market swings. While this turbulence alone is beneficial to gold, the metal is likely to receive even more support as higher risk will place more emphasis on hedging, especially in the absence of bonds that formerly fulfilled this role.

Inflation fears and inflation-resistant assets

Though not yet materialized in substantial form, inflation has been on the mind of every market participant ever since the government decided to expand the money supply with an unseen multi-trillion dollar stimulus. With the Federal Reserve and the European Central bank both stating their willingness to allow inflation to run past the targeted rate of 2%, the WGC’s report notes that gold prices increased by 15% on average during years where the inflation rate exceeded 3%. Of course, inflationary policies are just one of gold’s government-backed tailwinds, with ballooning budget deficits and the aforementioned normative of low to negative-yielding debt acting as pillars of support on their own.

Overseas gold demand increases

While last year’s demand for physical gold reached sky-high levels on one side, it was subdued from another as economic activity from the world’s top gold consumers slowed. The WGC expects this to change in 2021, projecting that consumer demand for gold from both China and India will return to form. The report cites data from the Indian Dhanteras festival in November as evidence that jewelry demand is already well on the track to recovery, having bounced back from the Q2 lows.

Central banks influence gold’s price

In contrast to 2018 and 2019, two record years in terms of central bank purchases, the WGC’s report forecasts a change in dynamic. With gold prices being near all-time highs, central banks could alternate between buying and selling, along with purchases no longer being widely spearheaded by Russia. Nonetheless, the WGC says that the official sector will continue to offer strong support for gold in the ever-growing bid to diversify foreign reserves, especially during a time of questionable fiat.

Investor Survey: Silver to Outperform in 2021

As part of its 2021 Outlook feature, Kitco surveyed a total of 1,015 analysts and investors regarding their outlook for precious metals heading into the new year. While the participants were bullish on commodities across the board, silver emerged as the standout forecast as has been the case for much of the previous year.

Why silver looks bright in 2021

56% of the participants, or 568 Main Street investors, named silver as their top metals investment and said that they expect it to outperform gold. Both gold and silver have done exceptionally well over the past 12 months, but certain nuances to the silver market have caused some forecasters to call for a price of as high as $50, up from current levels of around $24. A major part of this bullish sentiment has to do with an economic recovery and an overall push towards green infrastructure, one that was already prominent in Europe and Asia but should now gain traction in the U.S. as well.

The reinvigorated manufacturing sector, boosted by trillions of dollars of monetary stimulus, should help spur a bid for silver that could strain supply as the metal’s production is more complex than that of gold. Besides demand for silver in hydrogen power cells and other green technologies, silver’s investment component will also keep the metal on the same track that has seen prices more than double from their March lows, said the participants. The aforementioned stimulus has made inflationary expectations as high as they have been in recent memory, and few market watchers aren’t bracing for a significant rise in inflation over the next few years.

The many reasons gold will continue to shine

The same inflationary concerns should likewise help gold reclaim the $2,000 level sometime next year, up from its current level of around $1,900. Over the past year, there have been plenty of big banks and top names in finance who predicted that 2021 would see gold posting a new all-time high, above the current one of $2,070 set in August.

Besides inflationary concerns, a persistent low interest rate environment should also remain a major driver of gold prices. Interest rate slices started pushing gold prices up in the summer of 2019, and the surveyed participants expect low or negative interest rates around the globe to stick around until at least 2023. The dire straits that the sovereign bond market has found itself in has caused portfolio managers to reassess their stance, with many now beginning to view gold as a better alternative to hedge against stocks. While silver took the center stage of the survey, 10% of participants, or 140, nonetheless stated they expect gold to be the best performing asset this year.

Promising prospects for platinum and palladium

As for other precious metals, participants in the survey said they see platinum outperforming palladium by a slight margin in 2021, despite the latter’s shrinking supply and recent climb to all-time highs. Like silver, platinum has a strong industrial component and its price ties heavily into economic strength.