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