Do you believe that the price of gold will go higher if there is additional turmoil? Tariffs, global slowdown, yield curve, etc.
Is gold really a barbarous relic? Or is it an asset worth holding in a portfolio? Today, there are a few billionaires that have begun to add positions of gold in order to hedge against turbulent times. What exactly does a Fed rate cut mean for the price of gold?
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It’s no secret that central banks hate gold. If they could press a button and destroy every last grain of gold that has ever been produced, they would do it. Gold has always been the ultimate restraint on the ability of governments and central banks to create money out of thin air ad infinitum. Even destroying the gold standard, closing the gold window, and moving to a system of floating fiat currencies couldn’t dull the appeal of gold to investors and consumers worried about the purchasing power of their currency.
That’s why central banks have long sought to collude to keep gold’s price low. Whether it was coordinating sales of gold to depress the gold price, loaning out their gold stocks, or other methods, central banks have done everything in their power to minimize the importance of gold, to no avail.
During the last financial crisis more and more investors realized the ability of gold to safeguard the value of their assets, and so they piled into gold with abandon. The result has been a steady increase in gold’s price and a return of gold to many investors’ portfolios. And now that central banks realize that they won’t be able to destroy gold, they seem to have thrown in the towel. If you can’t beat them, join them.
Gold buying by central banks in 2018 reached levels that hadn’t been seen in nearly half a century, with 651.5 tonnes of gold purchased. That’s a 74 percent increase over 2017. Russia in particular made large purchases, its largest ever, with much of the gold purchased coming from the country’s own gold production. That’s part of a move by many central banks to lessen their dependence on the dollar.
In that sense central banks are no different than any other investor. They realize that remaining completely dependent on the dollar is a risky investment. Whether it’s the risk of being cut off from the US financial system or the risk of dollar devaluation due to the Federal Reserve’s loose monetary policy, piling too much money into dollar-denominated assets leaves you exposed. Holding gold provides a hedge against dollar exposure, as its value will continue to rise as the value of the dollar falls.