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Central Banks keep buying Gold. Why?

Published by Karl Martin Karus in category Precious metals on 30.07.2021
Gold price (XAU-SEK)
18 308,71 SEK/oz
  
+ 40,64 SEK
Silver price (XAG-SEK)
216,34 SEK/oz
  
+ 0,88 SEK

Highly increased money printing for stimulating the global economy, COVID-19 pandemic, fear of a worldwide market crash, etc., has led to massive central bank buying of gold. According to a recent report from the World Gold Council, 21% of global central banks plan to purchase gold this year. Thus the trend for central banks to buy gold appears to continue also in 2021.

Why Do Central Banks Keep Buying?

Central banks acquire and hold gold for several reasons.

Gold’s reputation as a portfolio diversifier and safe-haven asset is well recognized and undisputed. However, gold’s potential to increase risk-adjusted returns while simultaneously functioning as an effective form of collateral are less discussed but equally essential subjects.

According to the World Gold Council poll, no central bank plans to sell its gold holdings this year. The number of respondents who will increase their gold holdings has climbed to 21%, compared to 20% last year. No central bank is planning to decrease its gold reserves, declining from 4% in last year’s survey. (1)

“This year’s survey continues to highlight significant interest in gold amongst central banks, with the backdrop of the COVID-19 pandemic underscoring the importance of maintaining liquid, uncorrelated assets in a reserve portfolio. (1)

“Inflation has also resurfaced as an investment consideration and may inform central bank asset allocation in the coming years. We believe that central banks will continue to be net buyers of gold, albeit at somewhat lower volumes than those of the previous decade.” (1)

Gold has shown a strong performance in the past 18 months, during the Covid-19 crisis – that could be one of the main reasons why Central Banks keep buying gold this year.

Main reasons why Central Banks are accumulation gold

  • Gold is a well-known portfolio diversifier.
  • Gold has been a reliable store of wealth for centuries, making it a reliable and trusted asset.
  • Historically, gold has shown to be an inflation fighter. This is important, especially in today’s economic climate, where inflation is clearly on the rise. For central banks, gold is a solid inflation hedge.
  • Gold carries zero counterparty risk. gold is global and can not go bankrupt, default, or “mess” with its owners.
  • Gold is valued all over the world and is always accepted as payment.

Gold remains Bullish – Central Banks are buying

Gold price is showing strength in the long run. Three main technical factors support the power of gold.

  1. Break out from the falling trend, and the price is holding.
  2. Strong support level between 1750-1775 USD/oz.
  3. Gold is trading above the long-term trendline.

Those three primary technical analysis points combined with fundamental analysis support gold price long-term bullish uptrend.

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