As coronavirus-related measures are slowly winding down, it remains to be seen what happens to gold and other precious metal markets. Central banks will play a crucial role in this regard.
The Course of Action by Central Banks
For as long as the coronavirus crisis has gone on, there have been a lot of potential implications for central banks. If the Federal Reserve is any indicator, the printing of money will not stop anytime soon. However, one has to wonder how all of this will affect financial reserves held by these central banks as well.
Simply creating new money out of thin air – without reserves to back it up – is not a viable course of action. While it may be a short-term solution in the eyes of some, the rest of the world is convinced that this situation cannot be sustained.
According to Standard Chartered analyst Suki Cooper, there are some potentially interesting developments on the horizon. First of all, there is no real indicator that central banks will sell their existing gold supplies. The bigger question is whether or not banks are even in a position to consider the selling of such assets, given their current balance sheets.
Secondly, the impact of the upcoming recession following the coronavirus crisis remains uncertain. For most central banks, it will be pertinent to keep increasing their gold holdings accordingly. That may not necessarily come to pass, however, as purchases by central banks have slowed down since late 2019.
Gold Purchases by Central Banks Dry up
This trend is especially noticeable in terms of buyers of at least one metric ton of gold. Cooper confirms that just six central banks purchased such an amount or more in Q1 2020. Last year, during Q1, over 10 purchased such amounts.
When looking at the overall volume purchased, things are not looking great either. Russia, for example, is discontinuing domestic purchases. In Q1 2020, its central bank bought “just” 28 metric tonnes, compared to 55 tonnes the year prior.
On the other side of the scale, Turkey has accelerated its gold purchasing. In fact, its volume has increased by nearly 250% compared to Q1 2019. It is remarkable to see how different countries and domestic central banks approach this commodity in this day and age.
One possible use for existing gold holdings is to leverage then as collateral. How viable that approach will be, will become more apparent as time progresses.
All in all, it is very likely that gold will still rally in the next 18 months. Ongoing negative yields, quantitative easing, and stimulus packages will usher in a new recession sooner or later.
When that happens, the overall impact on the financial sector will be quite severe. Ultimately, that is a catalyst capable of pushing more people to gold and other precious metals for investment purposes.