The People’s Bank of China announced that they have increased their gold holdings to 59.56 million ounces or about 1,853 metric tons, from 59.24 million ounces previously. This marks an increase of roughly 320,000 ounces or over $400m US. The official reserve numbers had been unchanged since about 130,000 ounces were added in October 2016.
China is the world’s biggest producer and consumer of gold and it is probably no coincidence that they started buying gold again amidst stock market panic, slowing economic growth and an escalating trade dispute with the Trump administration. China has also publicly stated their desire to diversify away from use of the U.S. dollar in international trade.
They have picked a good time to increase gold holdings, as the yellow metal’s price has been advancing strongly over the past few months. On the technical chart, gold has established a new bullish trend with higher highs and higher lows.
Notice that the longer-term trend is also bullish, as gold put in a higher low in 2018 versus the early 2017 low. While we are likely to see a near-term pullback with the RSI momentum indicator flashing overbought, there has been a shift in our technical outlook to bullish over the past few months.
Furthermore, the price advance has accelerated in recent weeks, suggesting that gold could be in the early stages of another major bull cycle. If this is the case, we believe the gold price will easily make a new all-time high above $2,000/ounce within the next 24 months and challenge the $3,000 price level by the end of 2021.
The stock market correction appears to be more than a routine pullback and any continued weakness in stocks will increase demand for safe-haven assets such as gold. While a relief rally is likely in the near-term for equities, we predict more trouble ahead for the stock market in 2019.
In addition, the odds that the Federal Reserve may need to pause rate hikes or even reverse course in order to halt stock market declines, has pressured the U.S. dollar and boosted the appeal of gold.
For China, I think this announcement is just the beginning of a new aggressive push to increase gold reserves. I expect more announcements like this one in the months ahead.
Many people estimate that China is vastly under-reporting their actual gold holdings. While they officially claim just 1,853 tonnes, estimates pin the true figure at 4,000 to 6,000 tonnes. The reason they would not want to declare true holdings is because it would push the gold price up and make it more expensive to accumulate large holdings. Such an announcement could also pressure the dollar before they are able to sell their dollar-based reserves.
Gold is essentially kryptonite for the US dollar and buying gold is akin to shorting the US dollar. The rest of the world is sick of the heavy-handed economic and military practices of the United States and is increasingly looking to transact in currencies other than the U.S. dollar. They also want to invest reserves in assets other than U.S. debt. I believe the dollar will lose world reserve status much sooner than most analysts are anticipating.
Of course, it is not just China increasing their gold reserves. Russia has been steadily increasing gold reserves for years, while divesting of their U.S. debt and dollar holdings. The gold accumulation by China and Russia can be seen as part of a strategy to move away from international trade denominated in US dollars.
Poland and Hungary also announced major increases to their gold reserves in recent months. In the case of Hungary, they boosted their gold reserves by 10x, citing safety concerns. This was a large buy for Hungary, but small amount in relative terms.
Not only are nations around the world increasing their gold holdings, but there is also a trend of repatriation of gold bullion. A number of countries around the globe no longer trust the United States and England to hold their gold for them and have been sending it back to their homeland. Germany, Turkey, Hungary and Venezuela are included in the list of countries that have re-partriated part or all of their gold holdings from Western vaults.
The United States has the largest ‘official’ gold reserves of any nation by a long shot with over 8,100 tonnes. But many believe that the United States does exactly the opposite of China in respect to their gold holdings… they over-report. This is likely done in order to inspire confidence in the U.S. dollar or instill fear in their economic adversaries. Of course, absent an independent audit, the true amount of gold held by the United States is unclear.
In summary, the move higher in the gold price is likely to continue as central banks step up their purchases amidst concerns about global economic growth and the potential of another financial crisis. The ballooning debt in the United States, trade wars, military over-reach, unfair political policies and the potential for the FED to pause rate hikes are all factors driving a de-dollarization trend around the world. As the dollar rally exhausts and the USD index turns lower, this should amplify gold’s gains in the months and years ahead.
For investors, it is always a good idea to own some gold bullion in your possession. But we believe the best opportunity for gains can be realized via purchasing oversold gold and silver mining stocks. Gold mining companies with quality assets have seen their share price advance at 3 times the pace of the gold price advance over the past few months. For junior mining stocks, the leverage has been 4x to 5x the advance in the gold price.
So, while gold is up 10% from the August 2018 lows, many of the mining stocks in the GSB portfolio / watch list are up 30% to 50% in the same time period.
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