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3 Reasons Gold Prices are Set to Explode in 2020 and Beyond

Last Updated September 23, 2020 1:23 PM
Ayush Singh
Last Updated September 23, 2020 1:23 PM
  • Global central banks are accumulating gold at a record pace.
  • Credit Suisse MD and ex-Federal Reserve employee reveals the Fed will start another round of quantitative easing.
  • Increasing bank fragility will force people to park their wealth in gold.

Historically, whenever governments have indulged in currency debasement, gold prices have always accounted for the increase in the amount of money supply. But since the Great Recession, gold prices have remained subdued despite the massive money printing by central banks across the globe. This trend maybe about to change and here’s why.

Central Banks on Track for Record Gold Purchases

After being net sellers for decades, central banks have become net buyers of gold since 2010.

Central Banks buying gold
Central Banks have been adding to their reserves since 2012. | Source: Twitter 

The buying gathered pace in 2019. In the first six months, banks added 374.6 tons of yellow metal to their reserves. And a report published by the World Gold Council  showed that central banks have been adding even more since then.

The most notable purchase came from Turkey as it overtook Russia for the year. Turkey added 12.8 tons in October and saw its total reserves jump to 144.8 tons. The Turks have led the pack for two consecutive months.

In September, Germany’s central bank gold holdings rose for the first time in a century . Even the likes of Poland and Hungary have started adding massively  to their reserves.

Poland gold
The Poles have joined in on the gold-buying frenzy after 2017. | Source: Yahoo! Finance 

So far, global central banks have bought 589 tons of gold on a net basis in 2019. Last week, Bloomberg Intelligence reported  that central banks’ gold purchases are set to make a 50-year high.

The jump in central banks’ appetite means the likelihood of gold prices going up from current levels is high.

Quantitative Easing Will Make Gold More Attractive

According to Credit Suisse’s Managing Director  Zoltan Pozsar, the Federal Reserve is set to push more money into circulation in the form of another round of quantitative easing (QE). In a note to clients, he wrote:

If we’re right about funding stresses, the Fed will be doing QE4 by the end of the year.

Pozsar believes the recent repo rates operation won’t be enough to meet the liquidity demands of the banking sector and Fed will be forced to start another round of QE as early as next month.

The Fed’s balance sheet has already been growing at the fastest pace since the 2008 recession. So it’s highly likely that, with QE4, the balance sheet will grow at a faster pace.

Federal Reserve balance sheet
The repo operations are rapidly expanding Fed’s balance sheet. | Source: U.S. Global Investors 

Another round of QE means interest rates will fall. And since interest rates and gold price are negatively correlated, the value of the yellow metal is likely to rise.

Banking Instability in Two Important Countries

2019 has seen a significant rise in the frequency of bank runs in China. There have been five cases of bank runs in the country this year. Two of the banks needed help  in November.

In India, PMC bank was caught  cooking the books. This forced the Reserve Bank of India to step in and impose a 1,000 Indian Rupee (~$14) withdrawal limit for six months. The PMC bank bombshell dropped just days after India’s ‘Yes Bank’ was caught under-reporting its bad loans  by almost $500 million.

The banking sector of two of the world’s largest economies is standing on shaky ground. As the general populace’s faith in the fractal reserve banking system evaporates, they will actively have to look for alternatives to park their wealth and gold will be the obvious choice.

Gold has been on a bull run in 2019. Taking all the aforementioned tailwinds into consideration, there’s a good chance that gold prices will rise further.