Gold Bullion: Why This X-Factor Could Send Gold Prices Soaring

Gold BullionThis One Factor Could Cause Gold Prices to Skyrocket

After a solid move to the upside in the first two months of 2016, gold prices have come under fire. This shouldn’t bother you if you’re thinking long-term when looking at gold bullion.

One of the factors that precious metal investors should pay attention to are the central banks—specifically the ones that have a lot of gold.

You may be asking, why do they matter? Well, if they start selling, they could flood the gold market and gold bullion prices could tumble. If they are hoarding the precious metal and many others are buying, we could have an interesting situation at hand. Fortunately, these central banks aren’t selling the precious metal.

To give you some perspective, consider the Central Bank Gold Agreement (CBGA). At the very core, this is an agreement between the European Central Bank (ECB) and 20 other European central banks on how much gold bullion they could sell in a given year.

The CBGA was first signed in 1999, then called the CBGA1, and these central banks imposed a limit of selling no more than 400 tonnes of gold each year for five years. On May 19, 2014, they signed the CBGA for the fourth time (CBGA4). (Source: “Central Bank Gold Agreements,” World Gold Council, accessed March 23, 2016.)

These central banks have a lot of gold. The banks that signed the CBGA4 have 11,954 tonnes of gold bullion in their reserves. (Source: “Latest World Official Gold Reserves,” World Gold Council, March 11, 2016.)

Now the big question—how much gold bullion have these central banks actually sold? One would assume they have emptied out their vaults since gold prices have “crashed.” Wrong!

Below I have made a chart that depicts how much gold these central banks have sold over the last four CBGA agreements and how much they have sold during the most recent agreement. It is quite astonishing to say the least. These central banks have almost completely halted their gold sales.

Gold Sold by Central Banks Broken Down by CGBA Agreements (Years)

CBGA (years) Gold Sold
CBGA1 (Sep. 1999–Sep. 2004) 2,000 tonnes
CBGA2 (Sep. 2004–Sep. 2009) 1,884 tonnes
CBGA3 (Sep. 2009–Sep. 2014) 207 tonnes
CBGA4* (Sep. 2014–Sep. 2019) 3.39 tonnes **

Data source: “Latest sales under the fourth Central Bank Gold Agreement (CBGA4),” World Gold Council, March 11, 2016.

*The most current agreement.

** From September 2014 to the most recent reported numbers as of March 11, 2016.

Gold Price Outlook for 2016 and Beyond

Dear reader, I beg to ask you one simple question: if those who have gold aren’t selling it, and those who don’t have any are buying, what will happen?

It would create a major imbalance in the gold market. You have to remember that there’s less and less gold being discovered each year, since the supply side remains constrained with gold prices low and demand from consumers and investors staying solid.

Over the years, I have learned many things, but one thing that sticks out is that not everything has to be rocket science. What’s happening in the gold market is a simple demand and supply issue, and it is going to result in much higher gold prices. I truly believe we will see over $2,000-an-ounce gold one day. But it could take some time to get there.