Gold has been the metal to hold these last few months. While the base metals index has been at best trading sideways — and in many instances, gradually weakening — gold has been making a comeback.
Even before Fed announcements in January 2019, gold had been rising during the second half of 2018, reaching a peak in January of over USD $1,320 per ounce (its highest level since May 2018).
CNBC quotes an ABN AMRO analyst who says “Supporting gold is the double whammy of lower dollar and the (Fed decision on) U.S. interest rates.”
It’s true to say there is an inverse relationship between the greenback and the price of gold; as the dollar falls, it makes dollar-denominated commodities like gold cheaper for foreign investors and the price tends to firm. In addition, if interest rates weaken, the gold price can firm as lower interest rates reduce the opportunity cost of holding non-interest-earning gold.
The Fed’s decision not to raise rates — with “weakened” economic conditions as the justification for putting rates on hold — is a position the market now sees extended well into 2019 (not only reduced interest rate expectations, but the value of the dollar).
SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund, was at the highest price since June, according to Reuters, climbing 4.6% so far this month. That gain marked the biggest monthly gain since September 2017.
But investor interest has not been the only driver of demand.
In an effort to diversify out of dollar holdings, central banks — particularly emerging-market central banks — have been selling U.S. Treasuries and buying physical gold.
According to the Financial Times, central bank buying of gold reached its highest levels for almost half a century last year as Russia, Turkey and Kazakhstan led combined central-bank purchases of a net $27 billion worth of gold after sales by Australia, Germany, Sri Lanka, Indonesia and Ukraine, which sold a combined 15.6 tons are deducted.
Russia was by far the largest buyer, adding 274.3 tons last year, bringing official gold reserves to 2,066 tons, worth some $87 billion. At this level, Russia holds some 18% of its total reserves in gold. But if that sounds like a lot, compare it to Germany at 69% and the U.S. at 74%.
All these central banks have been selling dollars to fund their purchases, a move that has seen the greenback as a share of central bank reserve currencies fall to a five-year low in Q3 last year. Some eastern European countries joined the buying spree, making this year’s net purchases the highest since the U.S. moved off the gold standard in 1971, Reuters noted.
There is nothing to say this has run its course. Heightened trade uncertainty and slowing global growth will continue to create favorable conditions for gold demand, both from investors and central banks, in 2019.
In times of uncertainty, gold has not lost it role of safe haven.