The SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and other gold-backed exchange traded products are up about 2% this year. More gains could be in store for the yellow metal if global central banks continue boosting bullion purchases.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. Interest rates remain low in many developed markets and some emerging markets have been rapidly lowering borrowing costs since last year.
One central bank that is clearly upping gold purchases is Russia’s central bank.
“The Bank of Russia in January increased its holdings by almost 20 metric tons to 1,857 tons, topping the People’s Bank of China’s reported 1,843 tons. While Russia has increased its holdings every month since March 2015, China last reported buying gold in October 2016,” reports Bloomberg.
Over the past 20 years, gold has outperformed alternative and traditional assets, such as developed market stocks, hedge funds, developed markets debt, global real estate investments and the broader commodities complex.
“Gold offers Russia independence from the dollar amid financial sanctions from the U.S. and its allies,” according to Bloomberg. “The measures were imposed in 2014 as punishment for Russia’s involvement in Ukraine and could be tightened in future. Much of the country’s gold purchases come from local production — Russia is the world’s third-largest miner of the metal, according to research firm Metals Focus.”
Still, not all central banks are major buyers of gold.
“Only three countries in the top 10 have increased their holdings materially in recent years, with Turkey being the third. The U.S. is still the largest owner of gold, with 8,134 tons, much of it stored in Fort Knox. Germany is the second-largest, with 3,374 tons, and the International Monetary Fund owns 2,814 tons,” according to Bloomberg.
For more information on the gold market, visit our gold category.
Tom Lydon’s clients own shares of GLD.