07 Mar 2019

Gold Fever

Central banks bought more gold in 2018 than anytime since 1971, wehn the US ended the gold standard.

As we discussed at OUTLOOK 2019, the role gold will play in portfolio management will continue to grow as questions around global currencies and US dollar weakness remain. “…Geopolitics are now an overarching consideration. Any change in the global reserve currency status of the US dollar can be hedged by investing in multiple currencies and gold.”

In the last six years, global central banks have sold $130 billion net in treasuries and purchased $140 billion in gold. Gold buying is led by Russia’s central bank. Turkey and Kazakhstan, as well as India, Hungary and Poland have all began adding to their gold reserves.

So why gold, and why now?

The reasons why central banks buy gold is often a major topic of market speculation. More than perhaps any other investment, gold acts as an indicator of anxieties about economic growth, fears of geopolitical conflict and guesses about what the globe’s central bankers are thinking. 

But the fact is, Gold can help stabilize economies amid times of market turmoil. Consider:

  • Gold has a negative correlation with the dollar, which means its value often rises when there’s a dip in global demand for the U.S. currency. 
  • Gold is not subject to liquidity risk; its market risk is lower, and it does not have any credit risk.
  • There are no liabilities attached to gold and unlike stocks, bonds and currencies, gold cannot go bankrupt or go to zero.

In May of 2018, the Russian central bank's First Deputy Governor Dmitry Tulin told lawmakers in the lower house of parliament that gold was "a 100 percent guarantee from legal and political risks." And in October 2018, Hungary’s central bank governor, Gyorgy Matolcsy, said boosting gold holdings 10-fold was a way to make the nation’s wealth safer.

Diversification will continue to be an important driver of central banks’ demand for gold, as will the transition to a multipolar currency reserves system over the coming years. Most see their gold holdings in a similar way to investors - it makes up a small value of total assets but acts as a useful diversifier of risk. 

If you’d like to learn more about the history of the gold standard as well as the impact gold will have on the future of world currency, follow the link above to a great video we found.

Considering, discussing and preparing for the future is our passion. Connecting the dots between what is and what is coming in the world…and what that will mean for investment is what we do every day. If you’re looking for wealth management with a global perspective, we’d love to hear from you. Insightful conversation awaits!


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