Gold exchange traded funds, including the SPDR Gold MiniShares (NYSEArca: GLDM) and SPDR Gold Shares (NYSEArca: GLD), are being boosted by a variety of factors this year, but investors should not over look gold demand by global central banks.
Gold has long been used as a safe haven asset, particularly when the value of the dollar declines or investors fear market volatility and uncertainty, like in the case of a tariff war. Furthermore, it provides a hedge for inflation since its price typically rises in conjunction with consumer prices.
“The 2019 Central Bank Gold Reserves (CBGR) survey points to continued robust central bank demand for gold in the short and medium term,” said the World Gold Council (WGC). “11% of emerging market and developing economy (EMDE) central banks surveyed say they intend to increase their gold reserves over the next 12 months. This is similar to last year’s purchases, when 12% of the world’s 155 EMDE central banks bought gold.”
Boosting the case for gold is that the Federal Reserve recently alluded to no more rate hikes for the rest of 2019 after initially forecasting two. The capital markets initially expected rates to remain steady after the central bank spoke in more dovish tones following the fourth and final rate hike for 2018 last December.
Banks Backing Bullion
Data released earlier this year confirm that global central banks were big buyers of gold in the first quarter, a theme that is expected to continue in the second half of 2019.
“This is similar to last year’s purchases, when 12% of the world’s 155 EMDE central banks bought gold. This gave rise to 651 tonnes of central bank gold demand, the highest level on record under the current international monetary system,” according to the WGC.
Most of this growth was driven by substantial buying on the part of the central bank. Nine Central banks actively purchased gold bullion. Central bank net purchases totaled 145.5t in the first quarter of 2019, which was the strongest first quarter since 2013 (179.1t).
“The planned purchases are being driven by higher economic risks in reserve currencies,” according to the WGC. “In the medium term, central banks see changes in the international monetary system, with a greater role for the Chinese renminbi and gold. 39% of EMDE central banks cited anticipated changes in the international monetary system being relevant to their decision to hold gold.”
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