Look at Central Banks if You Want to Know Where Gold Prices Are Headed
Over the past few weeks, gold prices have dropped a little. In early May, the yellow precious metal traded around $1,920 per ounce. Now, it trades below $1,800. This represents a decline of more than six percent.
Should you be concerned if you’re a gold investor? Short answer: no.
With gold, investors must think long-term. They should pay very little attention to what happens in the near term. In the near term, gold prices may drop a little bit more. But the lower the price of the precious metal goes, the better opportunity it becomes.
Why be bullish on gold?
The big buyers, the central banks, remain in the market. The day that central banks say they hate gold and start selling their gold reserves on the market is the day that gold investors need to worry.
Right now, central banks love gold. In the first quarter of 2021, central banks purchased 95.5 tonnes of the metal for their reserves. In 2020, they were also net buyers of gold. (Source: “Gold Demand Trends Q1 2021,” World Gold Council, April 29, 2021.)
Keep in mind, 2020 was one of the most difficult years for central banks since the financial crisis of 2008–2009. Even then, they didn’t ditch their gold.
Looking at the bigger picture, central banks have been net buyers of gold since 2010.
Will they continue to buy? Yes.
Central banks are buying gold in order to diversify their assets. They have a lot of exposure to the U.S. dollar, and they want to hedge their reserves. It will be a long time until they are fully hedged.
Here’s some more evidence.
On a yearly basis, the World Gold Council (WGC) asks central banks what they’re planning. Will they buy more gold, sell it, or keep it?
In the most recent WGC survey, 21% of the respondents said they would increase their gold reserves in the next 12 months. This was higher than what they said in the previous year’s survey. Also, 52% of the respondents believed that central banks around the world would increase their gold reserves in the next 12 months. (Source: “2021 Central Bank Gold Reserves Survey,” World Gold Council, June 8, 2021.)
Gold Price Outlook for the Long Term
Dear reader, I remember the period between 2013 and 2015 very clearly. It was very tough for gold investors. By 2015, no matter where you looked, gold was deemed a useless asset. Anyone who was saying gold was a great investment was ridiculed. In the midst of all this, a great opportunity developed. Those who bought the precious metal and looked beyond the short term did very well.
Gold prices have come down recently, and I wouldn’t be shocked if they drop a bit more. This is mainly because many factors are working against gold at the moment. I call them short-term headwinds.
However, I remain bullish on gold. I believe central banks need more of the metal, and those banks are a major force in the gold market. If they continue to buy gold, investors would be foolish not to look at the precious metal.