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Chart 2: Central Bank Demand for Gold


THE MOST IMPORTANT FUNDAMENTALS WE HAVE TODAY ARE THE TAILWINDS THAT ARE LIKELY CAPABLE OF SUSTAINING A LONG TERM BULL MARKET IN GOLD FUTURES. THE FLOW OF FUNDS INTO GOLD MAY JUST BE GETTING STARTED.


Source: Bloomberg Intelligence


CENTRAL BANKS AGGRESSIVELY BUYING GOLD In addition to the “positive yield” advantage, the yellow metal has attracted the interest of central banks. It was another big year in 2019 for central bank gold demand, as purchases hit their highest level in more than 50 years, surpassing the previous record set in 2018. Central banks bought the most gold by volume in 2018, since 1967. It is expected that central banks will continue to be net buyers of gold in 2020.


What do central banks know and why have they collectively bought so much gold in recent years? One rule of thumb to keep in mind is that often it can be financially advantageous to follow what the strong hands are doing in any market and currently that would include gold.


POSITIVE YIELD A HISTORIC FIRST One of the major criticisms of gold ownership in the past is that it produces no income except for central banks that have been able to loan it out. Recently, for the first time ever, gold does provide a “positive return” at zero when compared to the negative yields in many countries in Europe and in Japan.


The amount of negative yielding global sovereign debt is increasing, which means some investors are becoming so risk averse that they are willing to pay to hold bonds.


ONE OF THE MAJOR CRITICISMS OF GOLD OWNERSHIP IN THE PAST IS THAT IT PRODUCES NO INCOME EXCEPT FOR CENTRAL BANKS THAT HAVE BEEN ABLE TO LOAN IT OUT.


FUNDAMENTALS ARE BULLISH AND BECOMING MORE BULLISH With the exception of the one or two-day outlier periods when all assets, including safe-havens, are liquidated in an effort to raise cash, gold will continue to be a safe-haven asset in times of economic turmoil in the long term. In addition, there is the accommodative central bank interest rate policies, aggressive buying of gold by central banks and gold’s newly found status of having a “positive yield” when compared to negative yielding assets.


The most important fundamentals we have today are the tailwinds that are likely capable of sustaining a long term bull market in gold futures. The flow of funds into gold may just be getting started.


The price of gold has already advanced 11% this year and could be on its way to testing its record high of just under $1918 that was set in 2011.


Alan Bush E: alan.bush@admis.com T: 001 312 242 7911


Published on March 16, 2020


13 | ADMISI - The Ghost In The Machine | Q1 Edition


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