By John McDonald
Central banks are making major policy changes this year, and more are coming in 2020. Gold investors should learn three important lessons from these banks’ changes in policy – and learn them fast.
As 2019 winds down and 2020 begins, the world’s central banks are changing how they do certain things. One of the biggest changes they are making revolves around these mega-banks’ gold policies.
“We have seen some pretty bold comments on gold from European central banks,” said Saxo Bank head of commodity strategy Ole Hansen in a recent interview. Hansen is known for tracking how investor sentiment, public commentary on trade news, and trader pain affects gold values.
Hansen is not the only one watching the central banks for clues about what the gold market will do in the coming 12-24 months, however.
Experts from investment firms around the world are weighing in with how they are leveraging central banks’ activities toward their own investing strategies.
Here are three of the most significant lessons gold investors should learn from central banks in 2020:
1. Gold doesn’t just provide stability to a portfolio; it is the bedrock of most monetary systems.
Even though no countries use the gold standard today (it was universally abandoned worldwide by the late 1970s), most countries still view holding gold reserves as the key to stabilizing their currencies.
In 2018, Poland became the first European nation to buy gold in two decades, and it has purchased more than 116 tonnes since then.
German Bundesbank president James Weidman said gold is “the bedrock of stability for the international monetary system,” and the Dutch central bank recently reported it believes “gold bolsters confidence in a central bank’s balance sheet and provides a sense of security.”
Lesson Learned: Investing in gold for your portfolio may link your returns to the same stabilizing factors employed by central banking systems around the world.
2. Recession threats are bad news for capital in dollars but not in yellow metal.
One reason so many central banks are buying up gold these days is because they hope to counter potential issues from a weakening U.S. dollar.
While some countries, like China, might like to ultimately replace the dollar with their own currency as the world’s reserve currency, such an event would cause a great deal of global economic unrest.
Only countries holding solid reserves of gold might find themselves in a position to benefit from this type of economic uncertainty or from a weakening dollar in the long run.
Hansen predicts that recession threats will keep gold in a good position and an actual “low point” in the U.S. economy lies further ahead.
This gives investors plenty of time to prepare for global economic turmoil, and central banks are buying up gold to take advantage of better positioning when the time comes.
Lesson Learned: Gold in your portfolio strengthens your overall investing position when the economic landscape gets rocky.
3. Negative interest rates will change gold as an asset class forever.
Historically, investors have purchased gold mainly as a “safe-haven” asset. They relied on their gold investments as a hedge against inflation and a last-ditch holding that would never be “worth zero.”
However, as more and more countries’ central banks seriously consider negative interest rates as a viable and disturbingly long-term practice, gold is likely to emerge as one of the most powerful asset classes in the world.
When this happens, central bank gold-buying could skyrocket values and change the way the asset is traded to the advantage of investors already holding gold in their portfolios.
“It might not take much for [central banks] to become gold buyers,” Hansen said recently. That day could be sooner than we expect.
Lesson Learned: Holding gold now could result in your possession of a massively appreciating asset in the future.
More Than Just Words
Central banks around the world are buying gold, but most of them are not talking about the practice.
You probably have heard about Russia and China making large gold purchases, but did you know about Poland before you read this article? How about Turkey, Iraq, India, Hungary, and Kazakhstan?
In 2018, central banks added 651.5 metric tons to their official gold reserves, up 74 percent from the amount purchased the year prior. 2019 is poised to continue that trend.