Last week the headlines on gold centered on the triumphant announcement from the World Gold Council that worldwide gold demand increased by a solid four percent for 2018. The subtext was the more important unsung story though.
It was actually a multiple decade high of central bank buying of the yellow metal that drove the gold increase, per the Gold Demand Trends 2018 Report of the World Gold Council. In keeping with gold’s five year average annual growth, gold demand for 2018 tallied 4,345.1 tons versus the 4,159.9 tons from 2017.
This may not impress or awe you initially, but if you keep reading the story, the significance of this movement forward in gold becomes more apparent. Central banks purchased 651.5 tons in gold for the year, with Russia leading the way. The real story is how Russia paid for their new 274.3 tons of gold in 2018.
According to the World Gold Council, the Russian government worked hard at “de-dollarizing” their foreign currency reserves. In other words, they paid for their massive new gold holdings through the near-total sell off of their United States Treasuries portfolio.
This is not something sudden and unforeseen for Russia either. The year 2018 marked the fourth annual year in a row of Moscow adding more than 200 tons of gold per year, as this chart below clearly shows:
By February of 2018, Russia had leapfrogged past China to secure the spot of fifth biggest gold holding nation on earth.
Russia liquidating their U.S. Treasuries in favor of gold was not the only vote of great confidence in the yellow metal for 2018. Central banks from Kazakhstan to Turkey were similarly huge buyers of gold reserves. China re-emerged as a major buyer of gold as well, revealing its official increase of the gold reserves in Beijing for the first time in more than two years.
Even normally gold-skeptic central banks in Europe joined in the buying spree. Both the national central banks of Poland and Hungary added massively to their gold reserves. Poland embarked on its biggest gold purchase in fully two decades. Hungary took the extraordinary step of boosting their total gold reserves by ten fold.
According to the World Gold Council, gold buying across the central bank spectrum was so convincing that 2018 represented the biggest yearly central bank net gold purchasing dating back to the year the U.S. closed its gold window in 1971. It was the second greatest yearly total in history.
Apart from a dire warning for the U.S. Treasuries market, what is the significance of this move back into gold by major and minor central banks the world over? The World Gold Council summed it up best this way:
“Despite a decade passing since the global financial crisis, times seem no less certain. Central banks reacted to rising macroeconomic and geopolitical pressures by bolstering their gold reserves. These actions are consistent with a recent survey commissioned by the World Gold Council: 76 percent of central banks view gold’s role as a safe haven asset as highly relevant, while 59 percent cited its effectiveness as a portfolio diversifier. And almost one-fifth of central banks signaled their intention to increase gold purchases over the next 12 months.”
Retail investors also demonstrated their rising confidence in the yellow metal in 2018. They purchased four percent more gold coins and gold bars in 2018 than in 2017. The fourth quarter of the year represented a late year surge in investment as stocks fell apart into the New Year.
Coins had an especially banner year as they attained a full five year long high of 236.4 tons. This was good enough for the second highest amount recorded. Gold bars demand remained steady on 781.6 tons, a fifth successive year holding the 780 to 800 tons range.
Across Europe, investors poured their money into Gold ETFs like GLD and IAU the two largest in the world. The inflows to European funds pushed worldwide growth for the year.
Is Your Retirement Portfolio Prepared for the Switch Out of Treasuries into Gold?
U.S. Treasuries have represented the Federal Government’s primary means of funding the rising American annual deficits for decades now. As more and more countries sell off their holdings like Russia, China, and Japan, the demand for these critical financial instruments dries up internationally. It is a dark warning for the future of U.S. government financial stability and the economy in general.
As the Russians have already amply demonstrated, gold is the direction you turn to in disconcerting financial times like these. It is the world’s best-known and -trusted safe haven for thousands of years now. Ignore gold and its time-tested safe haven protecting role at your own retirement portfolio’s peril.
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