Buying by Central Banks & ETFs Set to Propel Gold Prices Higher

Investors are taking a fancy to gold after the metal prices have started rising over the past month.  

The reasoning is simple. Investors are reaching out to safe haven assets as equities of late have seen a sharp correction.  

On the technical chart, we can see the bottoming pattern followed by a breakout from symmetrical triangle pattern. On the comex (commodity exchange), we need gold to break the resistance of $1,240. 

Central banks have started buying gold aggressively. First is Hungary. Hungary’s central bank has announced that it has increased its gold holdings from 3.1 metric tonnes to 31.5 tonnes. That’s a massive ten-fold. The idea is to make the country’s reserve safer and reduce currency risks.

Hungary is also on the same boat. It has increased its gold exposure for the first time after 1986.

Hungary’s is not the only central bank to increase gold holdings. India also had increased gold holdings in June-July. Russia is leading the way when it comes to buying gold by central banks. This year total of 264 tonnes of gold have been bought by central banks. Russian Central Bank added 26.1 tonnes in July alone. Last year i.e. in 2017, Russia added more than 223 tonnes. It was the third consecutive year where Russia has increased its gold by more than 200 tonnes in a year.

Now, Russia has taken over China to become the fifth largest gold holding country. As we can see in the chart, in February, Russia surpassed China in terms of gold holding reserve. China had surpassed Russia in this race way back in 2001. To be fair, China has not officially announced its increased in gold holding since 2016. So, Russia on paper would be the fifth largest although we think China still has more gold holdings than Russia.

If we look at other countries, not just Hungary but Poland, Kazakhstan and even Bangladesh are stepping up their gold reserves.

ETF holdings have also started witnessing more inflows which could mark the start of the new bull cycle for gold. Central banks which were on a selling spree from 2009 have now started reversing their role and with increase in gold prices, we are seeing more inflows into ETFs.

ETF and other gold related funds were the key swing factor in the gold market during 2013-15 when gold prices saw selling pressure. With ETFs turning buyers, gold will get the much-needed boost.