Increased Demand from Central Banks and ETFs Could Result in Higher Gold Prices
Gold prices could be setting up to go higher big-time. Thanks to central banks and investment demand, the yellow precious metal’s future looks very shiny.
You see, central banks have been very consistent buyers of the precious metal. They don’t care whatsoever about where gold prices trade; they just want more of the metal.
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Consider that, according to the World Gold Council, in the first quarter of 2018, central banks bought 116.5 tonnes of gold for their reserves. This was 42% higher than the first quarter of 2017, when they purchased 82.2 tonnes of gold. (Source: “Gold Demand Trends Q1 2018,” World Gold Council, May 3, 2018.)
The first quarter of 2018 marked the 29th consecutive quarter when central banks purchased gold. Mind you, we saw severe volatility in gold prices during this time. But that didn’t deter those banks from buying.
Their actions are speaking louder than words, and those actions are saying that central banks could continue to buy gold in the coming quarters and years.
It has been said several times in these pages already: central banks have a lot of buying power, and they are keeping gold for the long term. They are not speculators. If they keep on buying and storing gold, this could have a very positive impact on gold prices.
Don’t Ignore the Investment Demand…
During the sell-off in gold prices between 2013 and 2015, investment demand for gold dried up. More specifically, investment demand from the gold-backed exchange traded funds (ETFs) dried up.
Now, we see it coming back.
In the first quarter of 2018, gold-backed ETF holdings increased by 32.4 tonnes. The first quarter of 2018 marked the fifth consecutive quarter of increases in holdings at gold-backed ETFs.
Gold holdings at ETFs amounted to 2,400.3 tonnes at the end of the first quarter of 2018. This was the highest figure since April 2013. If you recall, that was just before the sell-off in gold prices began.
Gold coin and bar demand has been solid as well. In the last six quarters, precious metal coin and bar demand has amounted to 1,671 tonnes. To give you some perspective, the global gold mine output is around 3,100 tonnes. (Source: “Gold,” U.S. Geological Survey, last accessed May 3, 2018.)
That’s equivalent to 53% of the global gold mine output; it’s definitely not a small amount, and it’s something that shouldn’t be overlooked.
Gold Prices Outlook for 2018 and Beyond
Dear reader, if you listen to the mainstream media, it will have you convinced that gold isn’t worth it. You will hear all sort of arguments for not owning any gold.
You will be told that the yellow precious metal is a bad investment when interest rates are rising. Or that it’s just a useless asset for your portfolio and that it doesn’t provide any yield. And so on and so forth.
Pay no attention to those claims.
I can’t stress this enough: there’s a perfect storm brewing in the gold market, which could send gold prices significantly higher. Central bank and investment demand are making a very strong case for this.
For the rest of 2018 and beyond, I am very bullish on gold prices.
My reasons to stay bullish on gold are very simple: there’s strong demand for the metal and I doubt that the supply side is ready to meet that demand. Simple economics could send gold prices surging.
In the meantime, as the stage gets set for higher gold prices, I am keeping a close eye on gold miners. If the precious metal soars, gold miners could provide leveraged returns. As it stands, gold mining stocks seem to be selling for pennies on the dollar.
