Saturday, September 22nd, 2018 MST

Gold Loses Its Luster as a Haven . . .

. . . so writes Ben St. Clair in a recent issue of The Wall Street Journal.  The essence of St. Clair’s argument is that gold is down 4% this year and that lower prices have not generated buying.

But, has gold lost favor as a safe haven?  No, and here is one reason why not: central banks cumulatively continue to buy gold.

As of the end of the first quarter, central banks bought 116.5 tons of gold, for a year-over-year increase of 42%. Since becoming net buyers in 2010, central banks have bought – on average – 114.9 tons per quarter. Net purchases have become more concentrated since the 2013 peak, with Russia, Turkey and Kazakhstan collectively account for nearly 50% of net purchases over the last five years.

Notable net sellers were few and far between. Germany continued to marginally reduce its gold reserves by 1.4 tons in accordance with its coin-minting program. Qatar and Ukraine also sold in the first quarter, by 3.1 tons and 1.2 tons, respectively.

There is no doubt that gold’s lackluster price performance in recent months has been due to the stock market’s rebound since the January/February downturn.  Optimism about stocks stems from expectations that GDP will grow at or about the 4% level for the second quarter.  In fact, the Federal Reserve Bank of Atlanta’s GDPNow model estimate for real GDP growth in the second quarter of 2018 is 4.5%.

However, the economy is facing a headwind, the Fed, which is raising interest rates, with possibly two more this year. And, it is draining money from the system.  Since starting the drain nearly a year ago, the Fed has sucked a little more than $200 billion out of the system and plans by October to be reducing its holdings at the annual rate of $600 billion a year.

Still another headwind for the economy: over the last year the Treasury ran a deficit of $1.2 trillion and there appears to be no end in sight.  By the 2028, the interest alone on the national debt will be right at $1 trillion a year.

Never before in history has such an endeavor been attempted.  The Fed is now 105 years old and has several times increased the money supply, which resulted in inflation followed by recession after the money creation stopped.  Never before has the Fed – or any other central bank – attempted to reduce its holdings and thereby shrink the money supply.

Sounds like the central banks have good reasons to continue to have faith in gold as a safe haven.

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