The World Gold Council reports today in Gold Demand Trends 2018 (www.gold.org) that central bank buying in 2018 reached its highest levels since the United States decided to leave the gold standard in 1971. Money supply today is a multiple of what it was in 1971 but nevertheless the year over year increase in central bank buying was 74% (see below).
|Demand (Metric Tonnes)||2018||2017||Change|
|Bars and Coins||1,090||1,045||4%|
|ETF’s and Similar||69||206||-67%|
Source: World Gold Council
Increased purchases were led by Russia and Turkey and presumably should be seen in the context of reducing exposure to USD assets, vulnerable to sanctions. Reuters reported on January 24th that “China added gold to its FX reserves in December for the first time in two years, part of a broader trend toward reducing dependence on the USD amid fraying ties with Washington”. The Q3 2018 IMF report on central bank FX reserves showed that the USD’s share has fallen to 61%, down 3% since President Trump came to office.
ETF gold purchases were net negative in the first three quarters of 2018 but surged in Q4 as USD yields fell. Gold has not been an attractive investment in recent years as prices languished while equities surged and the Federal Reserve raised short term interest rates, a consequence of which is to increase the cost of holding Gold. The FOMC’s shift from ‘gradual increases’ to ‘patience’ means this headwind has peaked for now. With geopolitical tensions not going away anytime soon while the interest rate and firm USD headwinds ease, we expect both central bank buying and ETF purchases to be strong in 2019. We anticipate Gold will have a strong year.
Conor O’Mara, CIO
Jan 31st, 2019