What Recent Central Banks’ Unadvertized Moves Can Mean for the Gold Price Going Forward?

Gold has been creeping higher recently, easily outperforming not only blue chip stocks, but most crypto heavyweights, namely, Bitcoin and Ethereum. Gold is known to be the ultimate inflation-proof safe haven, however, its performance features intermittent periods of sudden spikes followed by rather prolonged sleeping cycles when the “gold bugs” happen to lose patience. However, most fund managers have a rare consensus view on lack of a single reason for gold to decline meaningfully given the contemporary state of a rapid and all but unstoppable fiat currencies’ mass growth.

American President Joe Biden has doubled down by increasing his bid to fund a sweeping economic agenda that includes large new investments in education, transportation and fighting climate change. Now it’s not a trillion- or even a couple of trillions, but a whopping $6 trillion program proposal that would take the United States to its highest levels of federal spending since World War II. This makes the very “gold bugs” equally keen on doubling down their bets on gold returning to its $2000+/oz levels sooner rather than later. Although gold remains down 5% YTD, it has moved up closer to the psychologically important US$2,000/oz level.

According to the World Gold Council, sentiment via COMEX futures increased as net positioning rose over 10% off March low, while outflows in gold ETFs turned last week into first glimpses of inflows. As China gold investment activity was muted in April as reflected in lower local trading volumes, Swiss gold exports hit a 10-month high in March, driven by higher demand in Asia. Additional impetus could come from slowly rising jewellery demand from postponed weddings, despite surging COVID cases in India – a traditional gold consuming nation due to its legendary wedding and celebrations traditions – are posing some concerns that the demand recovery seen in Q1 may slow incase infections will keep spreading. All in all, looking forward, WGC expects inflation concerns and the direction of interest rates to remain an important driver of gold prices going forward.

According to Bloomberg, gold stored in mints of the Bank of England has been selling for unusually high premiums recently, signaling that central banks may be back in the market as buyers. Bank of England’s London physical gold reserves – one of the largest in the world – are known to be stored and sold on behalf of other central and commercial banks. Based on LME data, over the past week, gold sold from the BOE has traded for as much as 50 cents above benchmark London prices. These premiums are reportedly being driven by buying from the Bank for International Settlements, BIS, which regularly trades the metal on behalf of the world’s central banks.

The BIS reportedly bought as much as 1 million ounces of BOE metal from various commercial banks at significant premiums. As a result, the premium for gold at the BOE rose to as much as 50 cents a troy ounce earlier this week. That compares with a range of zero to 20 cents under normal conditions.

This time around, these are the largest central banks that can act as main drivers for imminent gold gains as it happened for most of the last decade, as being the net sellers at it happened in Q3 of 2020 as some countries cashed in on surging prices – looked somewhat counterintuitive. Renewed buying could help sustain a rally in bullion, as the yellow metal is on the way to its biggest monthly gain since July. As such, it looks like the right time to increase weights of gold instruments, such as ETFs, in the portfolios by the inflation-aware private investors.