“Gold is money. Everything else is credit.” – JP Morgan 1912
Gold has had a good year rising about 30% over the last 12 months.
What has driven this increased demand for the yellow rock?
Interestingly, most of the recent buying from the last few years has been from Central Banks, given the inflation over the last few years and the massive level of US Debt (approx US$36 Trillion, not allowing for over US$100 Trillion of unfunded liabilities). When you consider the US Government earns an income of about US $4.9 Trillion and its adding to the debt about US $2 Trillion a year, the mathematics looks bleak.
Maybe foreigners are becoming less comfortable with owning their surpluses in USD? It can also be seen from the chart below that, from an historical perspective, Central Banks are holding less of their reserves as Gold and they may be returning to more normal levels.
China has not added to its pile of US treasury holdings since 2014, where it held about US$1.3 Trillion. They currently hold US $770 Billion.
As you can see from the below graph, this demand from Central Banks increased after the freezing of Russian USD assets.
There has also been a lot of trade between China and other countries where they have conducted the transactions in Yuan. The net surpluses are then converted into Gold and stored by that country as China has a closed capital account.
Whilst Gold has had a good run, there may be more of this to come as historically there were periods of the Gold price moving quite strongly.
As always all investments have risks and you should seek the counsel of your financial adviser to ensure that your strategy is appropriate for your goals and objectives.
Article by: Rob Coyte, CEO, Shartru Wealth Management