Gold is at the bottom now and will not fall again.. What is the secret of its consolidation near $2,000?

2023-06-09 12:08:00

It’s no secret that central banks around the world buy. Data from the World Gold Council revealed that in the first three months of the year, central banks bought a total of 228 tons, the largest volume ever in the first quarter.

This comes on the heels of what was already a record year in 2022, in which 1,136 tons of gold worth $70 billion were added to banks’ reserves. Compared to the 450 tons purchased during 2021, this represents a whopping 152% year-on-year increase!

The pace and consistency with which central banks are now accumulating gold is unprecedented, given that they have historically been mostly selling gold. But the recent transaction trend, particularly over the past 30 years, illustrates a dramatic shift in the official attitude towards gold.

In the early 1990s and 2000s, central banks were constantly selling gold as strong economic growth during that period made bullion less attractive than currencies in many places.

Then came the 2007-2008 financial crisis, which led to a complete shift in the official banks’ approach to gold. From 2010 onwards, central banks have been buying gold voraciously. Currently, regarding 80% of central banks hold gold as part of their international reserves.

Why do central banks buy gold?

Central banks love gold because the metal is expected to hold its value in turbulent times and, unlike currencies and bonds, is not dependent on any issuer or government. It also enables central banks to diversify away from other assets such as the US dollar.

And in the followingmath of what is considered the biggest financial crisis since the Great Depression, it would make sense to stockpile bullion for its safe-haven qualities; But that may not tell the whole story.

The main driving force behind the new wave of gold buying has been the so-called “emerging market/developing economies”, which operate a little differently from Western banks as their economies are exposed to greater risks during geopolitical tensions, and they also tend to distrust US reserves.

de-dollarization

It is not surprising, then, to see Russia and China being the two largest buyers of gold in recent years, accounting for regarding half of the total tonnage bought worldwide over the past two decades. Behind them was Türkiye, which ramped up purchases to 148 tons last year.

It should be noted that gold buying statistics such as those above only reflect what is being reported by central banks; Analysts believe that gold is, most likely, being bought by the likes of Russia and China more than it is being advertised.

The rationale behind these purchases, according to industry experts, is protection from foreign sanctions, as many of these banks want to hold more bullion as a buffer once morest any current or future sanctions. The Russian Central Bank might, for example, use gold to replace the US dollar (ie, “de-dollarization”) and circumvent Western sanctions when it comes to international trade.

“We believe this trend of central bank buying is likely to continue amid heightened geopolitical risks and high inflation,” UBS said. “The US decision to freeze Russia’s foreign exchange reserves in the followingmath of the war in Ukraine may have had a long-term impact on the behavior of central banks,” he added.

We also cannot forget that gold is one of the best hedges once morest inflation. Since the creation of the US Federal Reserve, the US dollar has lost 99% of its purchasing power, while gold has hardly been affected by the constant annual inflation. Inflation is also a major reason why countries like Turkey, which saw a more than 80% rise in price levels, bought more gold last year.

Most of the basic conditions for previous gold purchases (risks of financial turmoil, inflation, etc.) still prevail, and with the Fed’s calmness in its monetary policy in the coming period, gold will receive more support, which may push it towards new historical peaks.

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