FISCAL POLICIES On the fiscal side, governments around the world have initiated a variety of stimulus measures. The response in the U.S. has been swift and forceful. Congress has provided approximately $2.9 trillion in support for households, businesses, health care providers and state and local governments, and more is on the way. In addition, there have been massive economic stimulus programs elsewhere in the world including in the U.K., the European Union and Japan.
STIMULATIVE MONETARY POLICIES The world’s major central banks have been extremely accommodative and are rushing to add more liquidity to the banking system. For example, the Federal Open Market Committee cut its fed funds rate to zero to 25 basis points in March.
Interest rates are very low globally and in many countries are at historical lows, including interest rates in parts of Europe and in Japan that are negative and may become even more negative.
Chart 2: Federal Funds Target Rate
THE POSITIVE NET PURCHASES OF GOLD CONFIRM THAT IT REMAINS AN IMPORTANT COMPONENT OF CENTRAL BANK RESERVES AND IS INTEGRAL TO THEIR STRATEGIC ASSET ALLOCATION.
It is expected that central banks will continue to be net buyers of gold in 2020. The World Gold Council said central banks have continued to be net purchasers of gold this year, although at a slightly slower pace, as central bankers around the globe continue to focus on funding economic stimulus measures. The World Gold Council said, “The positive net purchases of gold confirm that it remains an important component of central bank reserves and is integral to their strategic asset allocation.” We have also seen a major effort by central banks to repatriate their gold from other countries, mostly from storage facilities in New York and London.
Source: 2020
MoneyCafe.com
AGGRESSIVE CENTRAL BANK BUYING OF GOLD Another reason for the advancing gold price may be the aggressive central bank buying in recent years. Central banks added 650 tons to their reserves in 2019, which is the second highest in 50 years, after the 656 tons that were added in 2018. Before the 2007-2009 financial crisis, central banks were net sellers of gold worldwide for decades.
Chart 3: Central Bank Gold Buying 1971-2019
So, what do central banks know and why have they collectively bought so much gold in recent years? Are they anticipating inflationary pressures eventually that may be precipitated by the unprecedented ongoing expansive global fiscal and monetary policies? Whatever their reasoning is to acquire gold there is one rule of thumb to keep in mind. That rule 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” FOR NONINTEREST BEARING GOLD Another reason for gold’s spectacular rise could be its newly acquired status of providing a “positive yield” when compared to negatively yielding sovereign debt in parts of the world. 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” of zero when compared to the negative yielding debt in many countries in Europe and in Japan. Some investors are becoming so risk adverse that they are actually willing to pay to hold some bonds.
The dominant fundamentals that we have today are the tailwinds that are likely capable of sustaining a long-term bull market in gold futures. For a variety of reasons, it appears that the flow of funds into gold may just be getting started.
Source: World Gold Council, Refinitiv GFMS, Metals Focus
Alan Bush E:
alan.bush@admis.com T: 001 312 242 7911
19 | ADMISI - The Ghost In The Machine | Q2 Edition
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42
