Want to Know Where Gold Prices Could Be Headed in the Long Term? Look at Central Banks
It’s important to keep the big picture in mind when trying to figure out where gold prices could be headed next. Daily fluctuations in the precious metal will give you nothing but anxiety.
The big-picture fundamentals say that gold prices could skyrocket. We could be looking at gold prices in the next few years and saying, “$1,300-an-ounce gold was cheap.”
Digging into the details…
Central banks are worth watching closely. They could be the force that quietly sends gold prices soaring to $2,000 per ounce in a matter of a few years.
First of all, the central banks already own a lot of gold. As per the most recent data from the World Gold Council, central banks around the world held 33,813.2 tonnes of gold bullion in their reserves. (Source: “Latest gold reserves statistics,” World Gold Council, last accessed June 21, 2018.)
What’s interesting to note here is that, despite the mainstream economists yelling and screaming that “gold is a bad investment,” central banks continue to trust it and buy more.
2017 marked the eighth consecutive year when central banks were net buyers of gold. It wouldn’t be shocking if central banks end up being net buyers of gold in 2018 as well.
Who Will Need the Most Gold?
Let’s get this straight, you can’t expect central banks to announce their gold purchases. If they do that, gold prices could skyrocket, and they may not get an attractive price. Keep in mind, central banks are essentially wealth managers for their countries. They don’t want to pay higher prices.
With that said, it’s not going to be countries like the United States, Germany, or France that will buy more gold. Relative to their reserves, they have plenty of the yellow precious metal. The U.S., Germany, France, and Italy have well over 60% of their reserves in gold bullion. That looks like they really think gold is a great investment.
It’s going to be the central banks that have very little gold relative to their reserves that buy the precious metal. Consider China, for example. Its reserves are just 2.4% gold.
It’s very hard to believe that China won’t buy more gold. Why? Because the country is trying to play at the same level as the U.S. and other major economies. It needs something solid to back its currency and wealth. Gold could do this job perfectly.
Look at Russia, too. It is also trying to gain dominance in the global economy. Just 17% of its reserves are gold bullion.
Countries like Japan, India, Saudi Arabia, the United Kingdom, Turkey, Brazil, Australia, and Switzerland have reserves that are made up of much less than 10% gold.
Could they buy more gold? It’s possible.
How Do We Get to $2,000/Ounce Gold?
I am keeping a close watch on Russia and China, mainly. These two countries have a lot of reserves and not enough gold. They could be impacting gold prices in favor of gold bulls in the coming years. They have been buying a lot of gold already.
If you are not paying attention to central banks, you could be making a big mistake. Central banks alone make a very strong case for $2,000-an-ounce gold in the next few years.