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Central Banks To Buy Gold

13 November 2020

Precious Metals Commentary

A couple of weeks ago we talked about the US election being a “risk event” for precious metals. Well, this week we had another – a potential COVID vaccine. Gold dropped over $100 overnight Monday on the announcement of the Pfizer/BioNtech Phase 3 preliminary trials with a claimed 90% efficacy rate.
usd gold price chart
We knew there was some sort of “premium” or fear factor money in gold around COVID but we were honestly surprised to see such a drop on this announcement. What was encouraging was that gold bounced of $1,850, which as you can see from the chart above, is a level at which it has rebounded previously in August and September.

ABC Bullion’s Global General Manager, Nick Frappell said in his recently Monthly Technical report that the initial reaction to the news by Pfizer seems to have been overdone and again smart money is seeing such dips as buying opportunities.

We would note that it will take some time before any vaccine will be available to the population at large but when that happens, JPMorgan says that pend up demand that has been repressed by COVID will be unleashed. Their view is that this will prove inflationary and therefore “recommended real assets such as real estate and precious metals”.

John Levin from TD Securities said that the price drop has results in good retail investor action in all key physical centres in Asia and for ABC Bullion’s Indian customers the price drop is especially welcome as today (Friday 13th) is an auspicious day to invest as part of the Diwali festival of lights.

We would also note that even with this price correction, gold is still up 23% in US dollars since the beginning of the year and 18% in Australian dollars. Silver outperformed gold on the price drop and year-to-date is still up 36% in US dollar and 31% in Aussie.

We were also encouraged to see this chart of the results of a survey of global fund managers by Bank of America which shows that long (ie buying) gold is not a crowded trade.
crowded trades
Nick says that gold has strong support at $1,837, which is the 38.2% retracement of the March 2020 to August 2020 bull market move, with $1,960 being the next resistance level.

Do as I Say, Not as I Do

Generally central banks are very loath to talk positively about gold, even though almost all of them hold the precious metal. It is not surprising of course, as gold is a monetary competitor to paper currency. Holding gold while not wanting to talk about it appears very much like a “Do as I Say, Not as I Do”.

The RBA, after receiving flak from its sale back in 1997 of two thirds of our gold reserves, has said little about its remaining 80 tonnes since. It does have a Q&A webpage about its gold holdings and we find it interesting that while it answers questions about the How, Where, What and Who of our gold, there is nothing about Why it holds gold.

European central banks are more open about why they hold gold and gold commentator Jan Nieuwenhuijs argues that European central banks have been preparing for a new international gold standard to counter US dollar hegemony.

However, a recent survey of central banks by website Central Banking and investment management company Invesco gives us new insight into why central banks hold gold.

While Q3 2020 saw central banks net selling a small 12 tonnes (primarily due to concentrated sales by two banks), the survey revealed 62% expect to increase their gold reserves over the next 12 months with zero indicating they would be decreasing.

Central banks invest in gold for much the same reasons as private investors, with the top reason being for gold’s diversification benefits, followed by low interest rates (so it is just individual savers suffering from no income!) and portfolio risk management. The euphemistic “International geopolitical challenges” was 4th ranked reason.

It was also interesting to see that the amount of reserves allocated to gold followed the percentages recommended by the World Gold Council in its research for private investors, being between 5-9%.
central bank survey allocations
The very large percentage allocations up to 50% are reflective of central banks who would have accumulated gold during the gold standard era.

The other survey item we found interesting was around concerns central banks would have holding gold ETFs (Invesco is an ETF issuer so they were probably using the survey to see if they could get central banks to use ETFs).
central bank survey ETFs
We probably couldn’t have put together a better list of the reasons to hold physical yourself rather than via an ETF. For normal investors liquidity risk would not be an issue but given the size of central bank transactions, they would move the price if they bought via an exchange. That is why central bank trades are mostly done in the over-the-counter market where a bullion bank can work an order and accumulate gold without impacting the market.

The other issue which is not mentioned in this list is that ETFs don’t trade 24 hours, being limited to the trading hours of whatever local exchange an ETF is listed on. With the majority of big moves in the price often happening outside of Australian business hours, the ability to transact around the clock on ABC Bullion’s website is a big advantage to pick up gold on the cheap when, like Monday night, gold has a correction.

While we are talking about trust, or lack thereof, monetary blogger JP Koning notes that a survey of Americans who don’t have a bank account (5.4% of households) found that 36% of them didn’t have one because they “don’t trust banks”. It won’t surprise you that in conversations with our clients we find that is a popular reason why they are precious metal investors.
 
Until next time,

Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at [email protected], or call us during trading hours on 1300 361 261.

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