Gold Is Back – Smart Money and Central Banks Are Buying
Gold has had a difficult year, falling from a high of US$ 1,366.07 in January to as low as $1,159.96 in August. In sight of US dollar strength and the US Federal Reserve tapering and raising rates, gold weakened. However, since August, as volatility in financial markets increased, the price of gold has risen above $1,220 an ounce. And, it has not gone unnoticed that a bottom in gold is in the making. Central banks and “smart money” are buying, big time.
I recently came back from the US after attending the annual LBMA conference in Boston from October 28th to 30th. Like every year, the delegates to the London Bullion Market Association’s annual gathering voted on their price expectations for gold. They expect a rise to $1,532 an ounce by October of next year.
I’m not sure what to expect of the gold price next year. I certainly expect it to be higher than today and I expect it to be a lot higher in the next 2 to 3 years. I base that on my expectations for financial markets over that time period.
We’ve had declining interest rates for over 30 years and that produced the biggest stock market boom in our generation. But now, the secular decline in interest rates is over. A growing economy, from here on out, will not be possible without rising inflation and interest rates. In the wake of inflation, higher interest rates and the solvency issues that will be borne therein, I expect a considerable shakeup in financial markets.
However, I’m getting a little ahead of myself. I don’t believe in forecasting; I believe in value. Gold is attainable at great value today and, in the medium- to long-term, it is set for another multi-year run, similar to the one we experienced up to 2012.
Gold price from 1970 to Nov. 2018
Source: World Gold Council, www.gold.org
From 2001 to 2011, gold went from a low of around $255 to a high of $1,821, a seven-fold increase that made a lot of people invested in gold very happy. I believe the stage is set today for a similar path in the coming decade.
Nobody likes gold!
This may sound counter-intuitive. Nevertheless, after a bear market, investors have to shun an asset class before it can go into its next extended bull market.
At the bottom of this latest gold market, nobody was interested in buying gold. At most, those with gold already in their possession have been holding on to it. Furthermore, there was no shortage of arguments why you should not invest in gold. It’s a historic relic with no practical purpose. It costs money to store it. It has no place in the “modern financial world”. The list goes on. These arguments have been making the rounds for a long time and yet gold has persistently and consistently acted as a solid and trustworthy store of value for a much longer time (thousands of years).
So, with all the negative sentiment surrounding the gold market, no investors were buying. For me, it’s easy to ascertain because I can specifically “count” the trades and volume being invested at Global Gold. It’s been a very quiet period, until only a few weeks ago.
Now the number of buy orders we are receiving is on the rise, both in silver and in gold. Considering the fact that it’s been seven years since the last bull market ended, the next one is overdue.
Gearing up for the next bull market
While gold is still relatively low on the priority list of most investors today, a variety of factors indicate a turnaround in the gold market. After the extreme negativity over the past few years, the price of gold has recently shown signs of life against dollar strength. This is a very positive development.
Most investors are still skeptical, but not all of them. Smart money (institutional investors and key market players) are back in the market and buying big. The list of central banks buying gold is growing rapidly. Central bankers from Poland, Egypt, India, Indonesia, Thailand and the Philippines are amongst the most recent additions to that list. The Hungarian central bank increased its gold reserves by a factor of 10 (!) during the month of October, expanding its holdings from 3.1 tons to 31.5 tons, an increase of over US$ 1 billion.
Let us also not forget the regular buyers who have been steadily stocking up over the past few months, most notably China and Russia. The Russian central bank has bought over 110 tons so far in 2018.
Moreover, inflation is back and expectations for further upticks are rising globally. Meanwhile, financial markets are toppish and increasingly fragile. Nervous investors everywhere are looking for ways to hedge and protect their wealth.
Finally, we are headed for recessionary territory. The global economy, including the US economy, is poised to experience a considerable economic setback. Multiple triggers are set to push us over the cliff (see my other article on this topic here). More and more experts, such as Ray Dalio of Bridgewater Associates, expect a deep recession in the next 24 months.