Are central bankers more worried than they let on about how this great monetary experiment of quantitative easing and negative interest rates might end? According to a new study by the Official Monetary and Financial Institutions Forum (OMFIF), central banks have added more than 2,800 tonnes of bullion – almost a tenth of global total demand – to their reserves since 2008, reflecting gold’s “renewed attractiveness as a safe-haven asset”, say OMFIF’s David Marsh and Ben Robinson.
Central banks in developed countries have kept their reserves steady, while their emerging-market counterparts have been building them up. The past eight years have seen the longest continuous spell of gold buying by central banks since 1950-65. Then, finance ministries and central banks piled up more than 7,000 tonnes as they strengthened their economic systems after the world war. Between 1970 and 2008, however, banks had run down their stocks.
The overall trend is set to continue. “As economic clout moves away from advanced economies, developing nations are likely to build up further gold reserves”, as Marsh and Robinson note – especially since their gold holdings typically still comprise a relatively small proportion of their overall reserves and they will want to diversify further from the major global currencies. In China’s case they make up just 2.3% of reserves.
What’s more, there are plenty of other reasons why central banks – or investors in general, for that matter – should find gold appealing in the months and years ahead. Gold tends to do well when interest rates are low. At these times, because gold offers no yield, its lack of income matters little. At present, says Capital Economics, more than 33% of the advanced economies’ sovereign debt offers a negative yield, both in nominal and real terms. So “the opportunity cost of holding gold has all but disappeared”.
On balance, moreover, we can expect further monetary loosening. While the US Federal Reserve may raise the cost of money by a small amount in the near future, both the Japanese and European central banks look likely to ease further in an effort to raise stagnant inflation and growth. The Bank of England could well take further action too.
There are also signs that inflation is edging higher in the US, which would bolster gold’s appeal as a traditional store of value. Both headline and core inflation (stripping out volatile food and energy prices) are on track to exceed the Fed’s 2% target by the end of 2016, according to Capital Economics. Gold also remains appealing as insurance against further upheaval in the eurozone and a Trump win in the US presidential elections. Expect gold to keep drifting higher.