Central Banks Making a Case for Much Higher Gold Prices
Gold prices hover around $1,800 an ounce at the moment, but they could go a lot higher. 2021 wasn’t anything great for the yellow metal, but 2022 could be a lot different.
It’s important to keep basic economics in mind when looking at the gold market. When demand increases and supply remains the same or drops, you get big price increases. This is true for all assets, not just gold.
As it stands, the demand for gold is robust, while the supply is very shaky. Therefore, all the bases are loaded for much higher gold prices. It wouldn’t be shocking to see gold trading at an all-time high by the end of 2022.
You see, there’s one type of buyer in the gold market that needs to be tracked closely: central banks. They’re like an elephant entering a swimming pool. No matter what the elephant does, water will get displaced.
Central banks love gold, and they’ve been buying a lot of it lately. They could be the key factor that causes major imbalances in the gold market.
Central Banks Bought More Gold in 2021
In 2018, central banks bought a record amount of gold. In 2019, their gold purchases were robust. In 2020, they stepped back a little, and rightfully so. There was a global pandemic, and central banks had to work on fixing their respective economies. The central banks still bought 255.0 tonnes of gold for their reserves in 2020.
Fast-forward to 2021 and central banks really stepped up their gold buying. They purchased 463.1 tonnes of the precious metal for their reserves. That was 82% more than in 2020. Mind you, central banks have bought gold each year between 2010 and 2021. (Source: “Gold Demand Trends Full Year 2021,” World Gold Council, January 28, 2022.)
In 2021, global mine production was about 3,560.7 tonnes. So, central banks’ gold purchases amounted to 13% of the global mine production that year.
And here’s the kicker: gold purchases in 2021 pushed the global gold holdings at central banks to almost 30-year highs! The central banks own almost 35,600 tonnes of gold.
Which central banks have been buying the gold? It has mainly been the smaller central banks from emerging economies. They started to realize that gold does a great job of reducing volatility in their reserves.
Actions speak louder than words, and it doesn’t look like central banks are done buying gold just yet.
Gold Outlook Is as Shiny as Ever
Dear reader, the future of gold looks bright, considering the demand side in general and what central banks have been doing.
And, as mentioned earlier, the supply side has been struggling. The gold industry in general has been having a hard time making new major discoveries, and the grades of gold in the ground have declined over the years. Also, the recent surge in costs has made it more difficult to produce gold.
Investors have overlooked gold for years. However, the fundamentals of the gold market are nothing but great. It’s just a matter of time before investors start paying more attention to the yellow metal.
I believe investors will eventually rush toward the gold market when they get tired of chasing hot stocks and not being able to generate high returns. We could be seeing a preview of it in tech stocks; they’ve been crashing. Once fundamentals start to matter more, gold will shine and gold prices will likely skyrocket.
In the midst of all this, I can’t help but look at gold mining stocks. Over the past year, gold mining stocks have taken a lot of heat from investors. Share prices have declined by a lot, even though gold mining companies have been generating solid amounts of cash and are in great financial positions. Once gold prices soar, gold mining stocks won’t be as cheap as they are now.