Is Now the Time to Buy Gold?
Gold prices returned above $1,300 this week amid news that China, the world’s second-largest economy, expanded its bullion reserves for the fourth consecutive month. The buying spree initiated by the People’s Bank of China (PBOC) suggests central banks around the world are turning to gold to hedge against economic risks and financial market instability.
PBOC Ups Gold Purchases
China’s central bank added 360,000 ounces of gold to its coffers last month, bringing its total reserve value to 60.62 million ounces, government sources revealed. According to ING, Beijing has increased its gold reserves by 1.38 million ounces since November, likely in response to U.S.-China trade tensions.
In the short-term, Asia’s largest economy is playing an important role in propping up gold at a time when rebounding equity markets and a resurgent dollar threaten to undermine the commodity’s appeal. Long-term, bullion demand is likely to increase as the trend toward de-dollarization continues. Countries such as China, Russia and other emerging markets are using gold to diversify away from the U.S. dollar, which is gradually losing its status as the global reserve currency.
Why Central Banks Buy Gold
A 2018 survey by the World Gold Council (WGC) revealed that central banks invest in gold for many reasons, chief among them being the yellow metal’s status as a safe haven asset. This makes gold an effective portfolio diversifier, especially during periods of heightened economic strain. The survey, which gauged the gold-buying habits of 22 central banks, also showed that policymakers boost reserves to improve risk-adjusted returns and increase the value of their nation’s collateral.
At the time the survey was taken, back in the summer of 2018, all 22 central banks said they expected to increase their gold reserves in the next 12 months.
Last year, governments added 665.1 tons of gold to their holdings, a 74% increase from 2017, according to WGC. It was also the highest rate of purchase since 1971, when the United States ended the gold standard.
Russia, which continues to move away from dollar-backed reserves, was the biggest buyer, followed by Turkey ad Kazakhstan.
“Central banks chose to significantly increase their gold reserves, reinforcing the importance of gold as a reserve asset,” the WGC said, according to Bloomberg.
Central banks are expected to increase their reserves by an additional 600 tons in 2019.
On Tuesday, gold’s per-ounce value rose $7.00, or 0.5%, to $1,308.90 on the Comex division of the New York Exchange. That was the highest level in over two weeks. Bullion slipped below $1,300 late last month after trading above that level for most of 2019.
Year-to-date, gold is up just 2.2% but recently peaked at its highest level in ten months. The yellow metal has gained 10% since the start of the fourth quarter when U.S. stocks began their long unwind from record highs to eventually re-enter bear-market territory.
If the fundamental stars align, gold could be about to enter a prolonged bull phase as investors transition away from risk-on portfolios. With the exception of India, the global economy is entering a period of rapid deceleration, forcing central banks to shift course on monetary policy. The International Monetary Fund, World Bank and Organization for Economic Cooperation and Development have all cut their growth forecasts this year.
While stocks have recovered sharply since the year began, valuation risks and weak earnings could undermine further ascent. The S&P 500 Index is considered overvalued above 2,800 because it implies per-share earnings will be 16.5 times forward earnings. Read more: Does this Chart Spell Doom for the S&P 500 Index?
Investors have several options for increasing their exposure to gold. In addition to buying futures contracts, gold miners and exchange-traded funds (ETFs) provide attractive and relatively easy avenues for investing. Read more: Why You Should Be Investing in Gold Now.
Featured image courtesy of Shutterstock. Chart via Barchart.com.