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Central Banks Are on the Biggest Gold-Buying Spree in a Half Century

Release Date:  Friday, February 1, 2019

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Gold and Silver Prices

Gold closed lower on Friday following strong U.S. jobs data but tallied a second weekly climb in a row after the Fed hinted at a pause in interest rate hikes, surrounding geopolitical tensions and the ongoing uncertainty with the U.S. and China trade war.

"'The current dip is due to a combination of a very sturdy payrolls report, despite the U.S. government shutdown, as well as strong manufacturing data from the U.S.,' said Tai Wong, head of base and precious metals derivatives trading at BMO.

"'Gold has also had a great run this week, surging above $1,300, so there is a bit of profit-taking here.'

"The dollar briefly turned positive after data showed that hiring in the United States rose to an 11-month high in January, taking some shine off the metal, before the currency reversed course to trade down against a basket of currencies.

"The overall outlook for gold remains positive, analysts said.

"The metal has gained nearly 14 percent since hitting more than 1-1/2-year lows in August, mostly due to tumultuous stock markets and on expectations the Fed could pause its rate hike cycle.

"'The Fed chairman's comments reaffirming that there would be no (immediate) rate hikes are going to keep gold up,' said Miguel Perez-Santalla, vice president of Heraeus Metal Management in New York.

"Fed Chairman Jerome Powell said on Wednesday the case for rate increases had 'weakened,' with neither rising inflation or financial stability considered a risk, and 'cross-currents' including slowing growth overseas and the self-inflicted wound of a government shutdown making the U.S. outlook less certain.

"Powell added that the central bank may end up with a larger balance sheet than anticipated.

"'Also, people are waiting to see what happens with the (U.S.-China) trade negotiations, and because of that, they're still holding gold and building positions,' Perez-Santalla said.

"'Market expectations over the Fed taking a break on rate hikes and persistent concerns over slowing global growth are themes that will ensure gold remains in fashion,' Lukman Otunuga, research analyst at FXTM, said in a note." ("Gold eases on strong US data, still on track for weekly gain," Reuters, CNBC, 01/30/19, updated 02/01/19.)

Gold ended the week up $14.50, closing at $1,317.10. Silver ended the week up $0.19, closing at $15.87.

Central Banks Are on the Biggest Gold-Buying Spree in a Half Century - Rowling and Barton

The last time central banks bought as much gold as they did in 2018 was when the U.S. left the gold standard.

"Central banks bought more bullion last year than anytime since 1971, when the U.S. ended the gold standard.

"Governments added 651.5 tons of gold to their coffers in 2018, a 74 percent increase from the previous year, according to a report from the World Gold Council.

"Russia, which is 'de-dollarizing' its reserves, was the biggest buyer, followed by Turkey and Kazakhstan. Hungary also made a large purchase, citing gold's lack of counterparty risk and role as a hedge against changes in the international finance system, the WGC said.

"'Central banks chose to significantly increase their gold reserves, reinforcing the importance of gold as a reserve asset,' the WGC said.

"Central banks are expected to acquire an additional 600 tons this year, according to the consulting firm Metals Focus Ltd. The buys, which will help the banks diversify their foreign-exchange assets in a time of extraordinary political volatility, signal a growing confidence in the metal's value moving forward.

"The banks 'were not net buyers even a decade ago,' said Juan Carlos Artigas, director of investment research at the WGC, in a telephone interview. 'As their foreign reserves expand, they are increasingly diversifying away from pure dollar exposure.'

"Slowing global growth, a weaker U.S. dollar and a drive by central banks to expand the amount of gold they hold could be a winning trifecta for investors seeking a recovery in the metal's price after its first annual loss in three years.

"Gold prices ended 2018 little changed, but rallied toward the end of the year amid concerns about Brexit, a falling stock market and expectations for a less aggressive U.S. monetary policy. The trend has continued this month, with bullion climbing to the highest since May." ("Central Banks Are on the Biggest Gold-Buying Spree in a Half Century," Rupert Rowling and Susanne Barton, Bloomberg, 01/30/19, updated 01/31/19.)

Gold Is Going To $1,500, Says Jim Cramer - Golubova

Mad Money's Jim Cramer believes gold can go as high as $1,500 an ounce.

"As gold prices wrapped up another great session and hit fresh eight-month highs, Mad Money's Jim Cramer said that he is a gold 'believer.'

"'We are big gold believers here. Now gold is at $1,300, we think gold is going to $1,400-$1,500. We suggest that everybody have a little bit of gold in their portfolio,' Cramer said on Wednesday.

"The big news of the day was the Federal Reserve keeping rates unchanged at a range between 2.25% and 2.50%.

"Cramer pointed out that the Fed Chair Jerome Powell did the right thing by focusing on 'patience' when it comes to future rate hikes.

..."' The only thing Powell caved to is reality ... This is about the economy - who doesn't want a healthy economy? If Powell had stuck to his plan for a series of lockstep rate hikes, it would've been a lot more devastation to Main Street than to Wall Street.'

..."during Mad Money's Lightning Round on Wednesday, Cramer said he likes gold better than silver, but added that silver is also likely to go up. 

"'Silver's trading up with gold. I prefer gold... but silver's going higher,' he said." ("Gold Is Going To $1,500, Says Jim Cramer," Anna Golubova, Kitco News, 01/30/19.)

Gold hits eight-month peak on US-China trade woes; focus on Fed - Reuters

Momentum in gold has been established as a possible trade war between the U.S and China persists, there's an expectation of lower interest rates and market volatility continues. 

"Gold jumped to its highest in more than eight-months on Tuesday, on doubts surrounding U.S.-China trade relations and ahead of a Federal Reserve meeting with increasing expectations for a pause to the central bank's rate hike trajectory.

"Spot gold was up 0.5 percent to $1,310.60 per ounce... having hit its highest since May 15 at $1,311.67 in the session.

"'The main catalysts for gold prices moving up today is an expected fallout in the (U.S.-China) trade war,' said Jeffrey Sica, founder of Circle Squared Alternative Investments.

"'There are also questions as to whether the economy is slowing, with a lot of indications that it is, and the trade war with China could escalate over the situation with Huawei.'

"The United States issued criminal charges against Chinese firm Huawei and its chief financial officer. Chinese Foreign Ministry spokesman Geng Shuang hit back at the United States asking it to end 'unreasonable suppression' of Chinese companies.

"Investors fear the charges could complicate high-level U.S.-China trade talks set to begin on Wednesday.

"Also adding to the mix are growing concerns over global growth after profit warnings from Caterpillar Inc. and Nvidia Corp on Monday, soon after European Central Bank President Mario Draghi reiterated worries about the economy.

"Additional impetus for gold came from expectations that the Fed will terminate its rate-hiking cycle. Fed policy makers are expected to release a policy statement on Wednesday... followed by a press conference from Fed Chairman Jerome Powell.

"Gold tends to rise on expectations of lower interest rates, which reduce the opportunity cost of holding non-yielding bullion.

"'There's plenty of reason to still look at gold as a means to have some protection' given expectations that other markets will continue to struggle, especially stocks, Saxo Bank analyst Ole Hansen said.

"'The momentum in gold has been established now. We just need to work out how strongly the momentum has been backed by speculative interest.'

"The metal has risen over 13 percent from a more than 1-1/2-year low touched in August last year, mostly due to volatile stock markets and a softer dollar." ("Gold hits eight-month peak on US-China trade woes; focus on Fed," Reuters, CNBC, 01/29/19.)

Gold Hits 9-month peak on Fed rate freeze; eyes monthly gain - Bose

A weaker dollar and slimmer chance of a rate hike combined with U.S-China trade talks all support higher gold prices.

"Gold rose on Thursday to its highest in nine months, after the U.S. Federal Reserve pulled the reins on monetary tightening, weakening the dollar and keeping bullion on track for its fourth straight monthly gain.

"Spot gold has gained nearly 3 percent so far this month.

"'The ongoing trend in precious metals markets continues. The much more dovish-than-expected Fed stance continues to support commodity prices across the board, weaken the dollar and support the precious metals complex as well,' said David Meger, director of metals trading at High Ridge Futures.

"The dollar also modestly extended losses after data showed the number of Americans filing for unemployment benefits rose to a 1-1/2-year high, feeding concerns of an economic slowdown.

"Holdings of SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, have climbed 4.6 percent this month, the biggest monthly gain since September 2017.

"The Federal Reserve held interest rates steady on Wednesday but said it would be patient in lifting borrowing costs further this year as it pointed to rising uncertainty over the U.S. economic outlook.

"Analysts said market players see a much slimmer chance of a rate hike, while the U.S. Treasury yield curve now points to possible future Fed rate cuts. Lower interest rates reduce the opportunity cost of holding non-yielding bullion.

"'The market now sees about a one-in-four chance of a 2019 Fed rate hike, while the curve is pointing to a small chance of a cut occurring as early as 2020,' INTL FCStone analyst Edward Meir said in a note.

"While the news propelled world stocks to their biggest January gains on record, risks to the global economy remain, with market participants focused on trade talks between the United States and China. Investors worry Washington's criminal charges against Chinese company Huawei and its chief financial officer could hurt the talks.

"If the sides cannot reach a deal, Washington has threatened to more than double tariffs on Chinese goods on March 2.

"Global demand for gold rose 4 percent last year, as central bank purchases surged to their highest levels since 1967, the World Gold Council said." ("Precious-Gold steady after hitting 9-month peak on Fed rate freeze; eyes monthly gain," Arijit Bose, Reuters, 01/30/19, updated 01/31/19.

After long slump, 'this could be gold's year' - Domm

Analysts say gold could reach toward $1,400 by the end of the year.

"Gold prices are hitting eight-month highs, thanks to investors looking for an alternative to stock market volatility.

"Prices are also being supported by a weaker dollar and buying by global central bankers and Asian jewelry buyers.

"The changing demand dynamic, and a flight to safety by skittish investors, has changed the prospects for gold and it could perform much better in 2019.

"'This could be gold's year,' said Suki Cooper, precious metals at Standard Chartered Bank. Since mid-November, when gold was at $1,200, it has gained about 9 percent.

"Some analysts expect the precious metal to take a rest and pull back in the near term, but then continue to edge higher later in the year and head toward $1,400 per ounce towards the end of the year.

"'We think we could see an average [for Q4] of $1,325. You could start see prices trading toward $1,400 by the end of the year,' she said. Gold has not been at $1,400 since September 2013.

"'We remain positive on gold,' said Jim Steel, head of precious metals at HSBC. 'I think the big change that's less spoken about is that financial market volatility is up compared to last year. If you see equity, financial market volatility, indicating a degree of investor uncertainty, that would explain why gold has become more popular in the last couple of months.'

"The dollar's recent weakness has also been a positive for the metal.

"'We're positive on gold but we're more positive on it for 2020,' said Steel. He expects an average price this year of $1,314 and a high of about $1,350.

"Steel said 23 different central banks were buyers of gold last year, and that helped support prices. Most prominent were Russia and Kzakhstan.

"'They often move together because they all have these same economic rationale. If one central bank has recognized that gold is a good asset to have or to hold in its FX reserves, then it's likely other central banks will arrive at the same conclusion and adopt a similar strategy,' he said. 'Most of the countries buying have low gold reserves. Those that do have a lot of gold like western Europe or the U.S., they're not buying....We think the central bank purchases will continue on a good vein.'

"The Brexit uncertainty has also helped gold, and so has the idea of trade wars.

"'Geopolitical risks can be supportive of gold but they have a short life span,' said Steel. 'If we were to think we're going to have trade wars, that would be a secondary support to gold.'

"'There tends to be an inverse relationship between trade flows and gold. In periods when world trade is growing quickly, gold prices tend to be low. The rationale behind that is high trade volumes usually mean low inflation, strong paper assets, strong dollar, strong equity markets,' he said.

"Cooper said there has also been strong buying by gold ETFs... now at its highest in six years...

"Asian jewelry buyers have become more active, and Cooper said Chinese consumers began buying back in December, ahead of China's Lunar New Year, which is early next month.

"'The consumer market has been somewhat lackluster and that's normally where we look to provide support for the gold market,' said Cooper." ("After long slump, 'this could be gold's year'," Patti Domm, CNBC, 01/29/19.)