Insider Reveals Gold-Buying Frenzy Among Elites

World Bank insider explains exactly why central banks are de-dollarizing with gold

Bullion.Directory precious metals analysis 02 April, 2024
By Peter Reagan
Financial Market Strategist at Birch Gold Group

The author, veteran central banker Kamol Alimukhamedov explains exactly why central banks are dedollarizing and buying record quantities of gold (for two years in a row).

The overarching idea, that central banks see gold as their best economic and political asset isn’t exactly new. We’ve been speculating about their motives for two years now. Alimukhamedov elaborates on their motives to an interesting degree. Personally I give this report a lot more respect than much of the research I read for three reasons:

1. Alimukhamedov is a central banker, moving in the lofty circles of the financial super-elite and presumably a lot more tuned in to what these folks talk about behind closed doors than you or I.
2. His report was published by the World Bank! If that’s not an official imprimatur, I don’t know what is.
3. Alimukhamedov isn’t selling anything – he’s not a trading house analyst talking his book. He’s a bureaucrat, not a bullion merchant.

First off, Alimukhamedov points out that the largest increases in central bank gold holdings occur when its country either anticipates or actually faces financial sanctions.

Russia’s example is a textbook one. It was already sanctioned extensively by the West in 2014 and 2015 – remember the invasion of Crimea? That’s when the Central Bank of the Russian Federation began making huge and regular gold purchases and became the top gold buyer year after year.

After the Ukraine invasion, U.S. and NATO sanctions became much worse… Yet the Russian gold hoard provided exactly the safety and liquidity the nation needed to mostly just shrug off the biggest stick the West could beat them with. Not even freezing nearly half of Russia’s central bank reserves, and denying the entire nation the SWIFT network (think Zelle for central banks) forced Russia to reconsider the invasion.

Other nations, geopolitical rivals (China) or potential regional rivals (Brazil, India) watched this happen. Their dollar assets, their national savings accounts, are one executive order away from becoming worthless. A dollar is only worth as much as a nation’s political relationship with the U.S. president.

That’s the weaponization argument – but it’s just a little too cut-and-dried. Consider, at the same time many countries that are considered peripherally Western (like Hungary or Poland) have been buying loads of gold bullion. I doubt Hungary is worried about Western sanctions. Poland is a NATO member nation, for crying out loud! They’re buying gold for another reason.

The main part of Alimukhamedov’s analysis is something he calls “Bretton Woods 3.” To quote a story we covered quite a while back:

“The world always returns to gold.”

Alimukhamedov outlines how the world went from gold bullion, to “inside money” (or IOUs that come with with confiscation risks) and seems to be going back to gold bullion again.

The only question that remains is whether the world has learned its lesson this time around.

Alimukhamedov also gives a nod to various market disruptions from 2008 onwards, which makes sense, as central banks became net buyers in 2010 and haven’t really looked back. To him, the curiosity now is whether other central banks are going to follow suit after Russia and jump into gold bullion as a means of protection. (To Kitco’s Ernest Hoffman, the last two years have already answered that.)

Alimukhamedov answers one question that I hear a lot: “Why do central banks have gold anyway?” Here you go:

Central banks are responsible for managing a country’s monetary policy and financial stability. One of their primary functions is to hold foreign reserves, which are assets held in foreign currencies or other financial instruments…

…central banks typically have three main objectives: safety, liquidity, and return generation. According to the latest World Bank survey, the majority of central banks – over 94 percent of the respondents – consider safety and liquidity to be highly relevant principles. On the other hand, only one-third of the banks gave high relevance to income generation or returns, while 65 percent considered it somewhat relevant. [emphasis added]

I‘ve said it before and I’ll say it again: Central banks own gold for the same reasons individuals do!

Frank Holmes often says that gold’s main drivers are the love trade and fear trade. The massive move up we are seeing might be the result of the fear trade materializing in ways unseen. Not to say that individual investors don’t have important things to protect, but for sovereign nations, the stakes are much higher.

Seems to me that the world’s central bankers have grown a little tired of gambling, considering the high stakes, and are taking their chips off the table.

The entire report is worth a read (but let me warn you it’s 72 pages long). I’m planning on taking a deeper dive into it later this week… Stay tuned.

Gold climbs past $2,250 amid strong dollar, updated forecasts abound

It is another week and another all-time high for gold, as has been the case… Well, it seems since the start of the year. This time it’s $2,265 as of latest counting, though $2,250 has been the headline price for most of the past week.

A lot of curiosities are being tied to what is a historic climb, some of which we’ve reviewed previously and others that are just now coming into the limelight. Sunshine Profits points out that gold is moving up alongside a strong U.S. dollar, with some interesting wording:

Gold’s moving higher and… the USD Index is moving higher as well, which one is faking it?

Ahead of a rate cutting schedule and a likelier than not monetary stimulus, our bet would be that the U.S. dollar is faking it. The analysis gives a technical insight into why the Japanese yen’s bearishness and bets against excessive bearishness could be the culprit. As we know, catching the driver of gold’s move up has been one of the trickiest parts, with others citing the rate cuts as well as heightened geopolitical tensions.

The analysis likens the move to that of 2011, providing some charts to back up the comparison, but it only goes so far. Even novice investors know that 2011 was the tail end of gold’s 2008-2011 run, and calls for a pullback weren’t difficult to find.

Then there’s the whole financial crisis bit: in 2011 or 2008, nobody struggled to understand why gold is climbing to such lofty valuations. (Learn more about big historical gold price movements here.)

Again, the environment the metal now finds itself in is almost on the opposite end. Monetary authorities have been tightening, not bailing out. There is no real black swan. But perhaps most importantly, forecasts from the biggest names in the industry are pointing to higher targets.

JP Morgan now predicts $2,400 gold, while calls for $2,500 and above in the mainstream are easy to find. Others have noted that Federal Reserve hawkishness is failing to negatively affect gold as it has in the past.

Gold moving up alongside the U.S. dollar is what we’d highlight in the run so far. It’s often said that risk-on assets are gold’s primary competitor, which is true. But the U.S. dollar, or more specifically a strong one, is its strongest downwards pressure. It’s what has kept gold down as it soared in every other currency, including top safe havens.

From there, a possible explanation emerges. Gold might simply be catching up to action in U.S. dollar terms, and what we’re seeing now is a market movement that should have been realized a while back. It explains the lack of bombastic drivers, immediate inflation and so on.

Others still are noting that investor sentiment, on paper or more accurately related to paper gold, continues to be mild. While all this is happening, funds have shed 100 tons of gold in Q1, hitting the lowest level since 2019.

And because of high prices, Indians have been locked out of physical gold purchases during the wedding season. These are two more strong downwards pressures, yet they seem to have no effect on gold’s price.

In a run like this, all one can do is watch and marvel. And, of course, ensure that their gold allocation is up to speed.

How much longer till silver follows gold’s price surge?

There are plenty of talking points surrounding gold’s move, but it’s not really a surprise to any careful observer. It’s going up fast and by a lot, but it’s not a bitcoin circa 2017-type of thing. The drivers are there and they are clear. Large institutions are calling for higher prices.

Instead, silver not going up is what has captured a lot of attention.

As some analysts have pointed out, silver is supposed to be blazing the trail ahead of gold and outperforming. It has been the case throughout history, and the gold-to-silver ratio is as askew as ever.

Commodity trader Dennis Gartman says that central bank gold demand is to blame, which we’ve heard before, and it makes sense. After all, central banks aren’t buying silver by the ton, and a relative lack of investor interest has been the hallmark of this bull run in gold. From that standpoint, it’s easy to see why silver might be lagging.

But it is doing conspicuously so.

The analysis above actually provides a technical overview as to why silver might retrace in the near-term during a time when every marker in gold is pointing up.

Not everyone is bearish on silver, though. Fawad Razaqzada, founder of Trading Candles, says that clearing $30 and moving to $50 is a matter of time.

We can be real here: $50 silver is what everyone wants and expects to see. Silver was $50 when it “shouldn’t have been” – that is to say, when the price of gold was far lower. We’ve covered plenty of notes on how psychological levels are of great importance, with the latest being $2,000 gold. Gold’s ability to stay above $2,000 does appear to have been a main part of the run we’ve seen over the past few months.

That’s the thing with $50 silver: the idea of it has been on investors’ collective minds for decades. They’ve seen it, and they know it’s possible. These days, it would only mean a normalization of the gold/silver ratio that would still leave the ratio higher than throughout most of history.

The closer gold gets to $2,500, and certainly if it breaches it anytime soon, the more everyone will wonder why silver hasn’t moved to $50 yet. If it hasn’t by that point, that is.

As it stands, silver that is bouncing between $24 and $26 during what can be argued to be gold’s best price surge in modern history is looking like an obvious buy. The downside is looks limited, and the upside is best left to the imagination.

This article was originally published here

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