Economic times are changing, and gold is playing a substantial role for investors and central banks. Due to recent massive purchases from China and Russia, gold sales have reached a six-year high according to the World Gold Council, a leading authority on gold.
Central banks are in a diversification mode away from the US dollar, with gold reserves surging over 145 tons in the past 3-5 months. This figure is a 68% increase from the previous year. The Council also notes increased gold purchasing activities by other countries
such as Columbia, Qatar, and Ecuador. With this overall rise in central bank purchases, gold prices are steadily going up. Ironically, as the central banks accumulate more, retail investors are complacent.
In the meantime, this activity sets up a foolproof scenario for financial institutions and large private investors to accumulate precious metals that smaller retail investors are leaving behind. Effective small investor diversification strategies are instead benefitting central banks and big investors. So, why hedge with gold this year? As the central banks migrate away from the US dollar to hedge against a vastly uncertain global economy, investors should recognize their intelligence. The central banks are well aware of the current movement in gold supply and the fact that small mining companies manage nearly one- quarter of gold production. As well, investors often turn to gold when the economy is uncertain or unstable. Gold is a form of sound money, unlike the speculative form of paper money. There are several other reasons besides central bank actions to consider hedging with gold this year:
1 Stock Market Enthusiasm To Recession. While stock market enthusiasm is at an all- time high given recent trends, so comes the opinion that America is due for a downturn. We felt it in December, but the market made a rapid recovery in early 2019. Historical data shows a slowdown or recession likely every ten years. Many investors find this time, when the party is soon to end, the best time to diversify in precious metals, especially gold and silver. Some call it recession-proofing.
2 Political Landscape Drives Gold. A US presidential election drives gold, regardless of your party preferences. Gold prices tend to rise along with demand in the pre- and post-election months. It is often a time when the gold standard is promoted in lieu of whatever political outcomes please or displease the general American public.
3 The Federal Reserve Failing Us. The Federal Reserve made attempts to normalize interest rates last year, but the Federal Reserve balance remains high, and the cost of living is continually going up. When (not if) a recession strikes, we may not be able to count on the Fed. This drives investors to consider gold as a safe hedge again, the inevitable.
4 The Global Outlook. The World Economic Forum articles indicate that our worldwide geopolitical situation is at more risk
than ever before, with economics and foreign trade tensions some of the prevailing concerns. Potential uprisings between nations lead to monetary repercussions, and that drives the demand for gold for many countries (as seen in the recent central bank actions).
5 The Weakening US Dollar. The US dollar as a world currency is becoming more controversial as countries’ economies fluctuate and international trade agreements waver. Wolf Street states, “The US dollar’s role as the global reserve currency is defined by the amounts of US dollar- denominated assets – US Treasury securities, corporate bonds, etc. – that central banks other than the Fed are holding in their foreign exchange reserves.” They go on to say,
“To diminish the dollar’s role as a global reserve currency, these central banks would have to dump the dollar.” The fact
is, central bank holdings are as low as they have been since 2013. This fact drives the desire to hedge with gold, as it rises and the dollar depreciates.
6 Living Expenses on the Rise. As the cost of living continues to rise in many cities, some middle-class Americans feel the pain. Many families find it challenging to withstand everyday living expenses, and yet wages rarely change to keep up with inflation. These are times when gold inspires small investors as a safe haven asset and long-term strategy.
7 Historically, Gold is Safe Money. Interestingly, gold has surpassed the test of time, while many alternative forms of currency have come and gone. According to J.P. Morgan, “Gold is money. Everything else is credit.” The central banks own significant amounts of gold; why wouldn’t the small investor get on board before the prices skyrocket. In fact, in 2019 alone, the central banks acquired up to 651 tons of gold. While the overall goals of central banks may not be the same as they are for small and large investors, everyone shares a common philosophy: hedging with gold in the case of economic and geopolitical uncertainties is a responsible move.
Keep in mind; the Federal Reserve still holds the largest gold reserves in the entire world. The adage that states “you want what you can’t have” is not yet the case. The reality is, gold supply is on a slow decline while gold production is decreasing; this, in turn, is leading to increasing gold prices. The reasons banks and investors turn to gold are not always obvious or expected. There is no wrong time to invest in precious metals. Whether we face an economic boom or bust, gold is still a proven investment. Hedging with gold is fast becoming a popular solution for uncertain economic times, but the time to invest might be this year.