Central Banks Still Buying
Recent data from the World Gold Council suggests that global central banks remain strong buyers of gold. Global central banks added just over 30 tons in July to their holdings, a figure that was inline with net purchases the month before. Gross purchases for July tallied some 34.3 tons, while net purchases for June had totalled some 63.1 tons.
Despite July’s lower net purchase figure, the data does point to a continuation of a trend in central bank buying. Large purchases were made by several emerging market central banks, including Brazil, Thailand and Hungary. These bigger buys are not likely to be repeated, however, and could put purchase figures more on track with the longer-term trend.
Total gold sales were significantly lower compared to June. Only some 4.2 tons were sold for the month, with only Qatar and Poland showing meaningful declines in their gold reserves.
All in all, the data seems to suggest that central banks remain positive on the gold market and that more buying could continue. Gold’s recent declines have not been viewed as a negative by central banks either, but rather may have been viewed as a positive buying opportunity to purchase the yellow metal “on sale.”
Central banks look to buy and hold gold for several reasons. The yellow metal can provide portfolio stability for central banks while also adding needed credibility to their respective currencies. Gold can be an excellent means of diversifying a portfolio and central banks also need this diversification for their large holdings.
In the current global environment of weakening fiat currencies ,rising sovereign debt and other geopolitical risks, owning a large allocation in gold has likely never been more important. With the U.S. Dollar at increasing risk of losing its spot as the global reserve currency of choice, central banks may look to gold, considered by some to be the only true form of money, as an alternative.
The global importance of gold may just now be starting to be more thoroughly understood. As demand for gold rises further in the months and years ahead, prices stand to rise and rise substantially. After making new all-time highs last year over $2000 per ounce, the market has pulled back significantly. Currently valued at just over $1800 per ounce, the yellow metal has taken its time digesting last year’s upside. The key, however, may lie in the fact that any substantial declines in gold have been aggressively purchased by traders as well as long-term investors. With long-term players willing to step in and buy the dips, the future for gold looks very bright indeed.
The bulls remain in control of the daily chart and will look to take out resistance in the $1830-$1840 region on a closing basis. The bears, on the other hand, will look to take prices down to the $1775 area. Central bank buying could, in the meantime, provide the bulls with additional support and reasons to buy, boosting prices along the way.