Are central bankers more worried than they let on about how this great monetary experiment of quantitative easing and negative interest rates might end? According to a new study by the Official Monetary and Financial Institutions Forum (OMFIF), central banks have added more than 2,800 tonnes of bullion almost a tenth of global total demand to their reserves since 2008, reflecting gold's "renewed attractiveness as a safe-haven asset", say OMFIF's David Marsh and BenRobinson.
Central banks in developed countries have kept their reserves steady, while their emerging-market counterparts have been building them up. The past eight years have seen the longest continuous spell of gold buying by central banks since 1950-65. Then, finance ministries and central banks piled up more than 7,000 tonnes as they strengthened their economic systems after the world war. Between 1970 and 2008, however, banks had run down theirstocks.
The overall trend is set to continue. "As economic clout moves away from advanced economies, developing nations are likely to build up further gold reserves", as Marsh and Robinson note especially since their gold holdings typically still comprise a relatively small proportion of their overall reserves and they will want to diversify further from the major global currencies. In China's case they make up just 2.3% of reserves.
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What's more, there are plenty of other reasons why central banks or investors in general, for that matter should find gold appealing in the months and years ahead. Gold tends to do well when interest rates are low. At these times, because gold offers no yield, its lack of income matters little. At present, says Capital Economics, more than 33% of the advanced economies' sovereign debt offers a negative yield, both in nominal and real terms. So "the opportunity cost of holding gold has all but disappeared".
On balance, moreover, we can expect further monetary loosening. While the US Federal Reserve may raise the cost of money by a small amount in the near future, both the Japanese and European central banks look likely to ease further in an effort to raise stagnant inflation and growth. The Bank of England could well take further action too.
There are also signs that inflation is edging higher in the US, which would bolster gold's appeal as a traditional store of value. Both headline and core inflation (stripping out volatile food and energy prices) are on track to exceed the Fed's 2% target by the end of 2016, according to Capital Economics. Gold also remains appealing as insurance against further upheaval in the eurozone and a Trump win in the US presidential elections. Expect gold to keep drifting higher.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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