Central Banks Could Send Gold Bullion Soaring
If you are looking to get direction on where gold bullion prices are headed, then look at the central banks around the world. They are becoming a major player in the gold market.
Simply put, central banks are buying gold bullion.
This phenomenon shouldn’t go unnoticed whatsoever. Central banks could send gold bullion prices much higher.
Consider this; in 2015, central banks purchased 588.4 tonnes of gold bullion. In 2014, they purchased 583.9 tonnes of the yellow precious metal. Mind you, they have been buying for a very long time. The fourth quarter of 2015 marked the 20th consecutive quarter when central banks added gold bullion to their reserves. (Source: “Gold demand resilient in 2015 as central banks and consumers spur strong H2 recovery,” World Gold Council, February 11, 2016.)
Bringing in some perspective, in 2015, global mine production was 3,000 tonnes. Central banks’ purchases in 2015 amount to roughly 20% of the global mine production! (Source: U.S. Geological Survey, last accessed February 23, 2016.)
With all this said, one must ask this question: why the change of heart?
Central banks hated gold for a very long time; now, all of a sudden, they are buying it? Why?
If you have been paying attention to the global currency markets, you’ve likely noticed that there is a significant amount of currency debasement occurring globally. Right now, there are at least five central banks implementing a negative interest rate policy (NIRP).
Of course, central banks hold currencies in their reserves, so they are facing severe volatility. They need something that could bring some calm to their reserves. Gold does a great job at this.
As I see it, central banks have bought an extensive amount of the precious metal already, but they need much more. However, the demand won’t come from the major central banks; instead, it will come from emerging economies. We have already seen the central banks of Russia, China, Turkey, and Kazakhstan adding a significant amount to their reserves. More will follow.
Why Gold Is Worth a Look in 2016
Here’s what I am willing to bet: Central banks will never announce how much gold bullion they are going to buy. If they do so, they will risk moving gold bullion prices higher before they purchase. They will buy first, and then report.
Here’s something you should also keep in mind: central banks’ continued gold bullion buying says that they don’t care about the price. They bought in 2011, when gold prices were hitting all-time highs. They also bought in 2015, when the yellow precious metal was called a “pet rock.” Central banks’ gold buying also suggests that they see value in the precious metal and are buying at any cost.
I remain bullish on gold bullion prices ahead. I really question how one could be bearish when there’s clear evidence of a major buyer in the gold market. I’d be cautious if they were selling.
Gold bullion prices have already surprised many investors so far. The yellow precious metal is one of the best-performing assets year-to-date. It will not be surprising to see these gains persist throughout the year. In fact, 2016 could go in the history books as “one of the best years for gold investors.”