Central banks are involved in the stock market now more than ever. And, in the long term, that’s going to be a great thing for gold.
Let me explain…
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According to a survey by Invesco Ltd., of 18 central bank reserve managers in Europe, the Middle East, and Africa, 80% said they planned to buy stocks with their reserves!
Central Banks Investing in the Stock Market—Why?
Why would central banks enter the stock market? Aren’t they in the business of managing liquidity in an economy rather than being stock investors?
We are told that central banks are buying stock because of low yields on their traditional investments, like bonds. In other words, for decent returns, central banks have nowhere else to go with their money than into stocks.
The head of investments at the Bank of Finland, Jarno Ilves, said it best: “When yields started to get really low and closer to zero in 2014, we decided to start equity investments.” (Source: “Central Banks Embrace Risk in Era of Low Rates,” The Wall Street Journal, January 23, 2017.)
The idea of central banks buying stocks is ridiculous and scary. Central banks are considered the most conservative investors. They essentially manage the wealth of nations. If they are stepping into risky investments, it must be questioned.
The Real Reason Central Banks Are Buying Stocks
I believe that central banks are buying stocks for a different reason: they are engaged in a dangerous game of lowering their currency value. Their thinking is, if they lower their currency value, it will help increase exports and eventually bring economic growth.
How does it work in relation to buying stocks? The central banks print money out of thin air and then use the funds to buy stocks. This puts downward pressure on the currency of the country printing the money and buying stocks.
The Swiss National Bank is a prime example of this. It has actively printed money and has been buying stocks. In 2009, seven percent of its reserves were invested in stocks. Today, that figure is 20%. It has stakes in companies like Apple Inc. (NASDAQ:AAPL), Exxon Mobil Corporation (NYSE:XOM), and Microsoft Corporation (NASDAQ:MSFT).
The Bank of Japan has been printing money and buying local real estate investment trusts (REITs). All in the name of a lower currency and the hope of economic growth.
In mid-2015, the central bank of China said it wanted to stabilize its crashing stock market and provide liquidity, which means it was buying stocks. (Source: “China Central Bank Pledges Liquidity Support to Stock Market,” Bloomberg, July 7, 2015.)
The South African Reserve Bank’s governor literally said that it went “from being a liquidity manager to focusing on investment management.” (Source: Ibid.)
Why Gold Prices Could Surge as Central Banks Buy Stocks
With central banks buying stocks now a known fact, this affects gold prices.
Gold is one of the best investments during currency devaluation. As central banks print money and buy stocks with it, they are essentially devaluing their own currencies. This makes gold a compelling opportunity.
As I see it, with more central banks stepping in to buy stocks, this could be the catalyst that causes a super spike in gold prices. Hence, my conviction of a gold price of $2,500 an ounce only became stronger.
