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LAWRIE WILLIAMS: Another Central Bank makes big gold purchase in June.

The gold price has been struggling again in the past week and ended it only marginally above the $1,800 mark at around $1,802.  Silver continued to struggle too, but did slightly better than gold with the Gold:Silver Ratio coming down a little to 71.6 after topping 72 earlier in the week.  Overall all the precious metals fell over the week, with the exception of palladium which managed a paltry 1% rise.  Year to date palladium is also the only major precious metal in positive territory having risen 8.5%.  Gold is off a little over 5% YTD, silver 4.5% and platinum 1.3%.  Clearly not a good start to the year for any of them despite positive expectations back in January.

Indeed gold and silver might have done much worse had it not been for some strong heavily-reported Central Bank gold purchases.  First there was Hungary, which tripled its gold reserves to 94.5 tonnes in March with a 63 tonne one-off gold purchase.  This was followed by Thailand which added 90 tonnes over April and May, and now Brazil which increased its gold reserve by 41 tonnes in June.  None of these gold reserve additions had been flagged in advance. 

However there has also been a recent report that the Polish central bank is looking at purchasing another 100 tonnes of gold at some unspecified time in the future.  (It should be remembered that this country added a similar100 tonnes to its gold reserve in 2019 and is now looking at confirming its much stronger economic position with the purchase of a similar amount).  It is assumed that these gold reserve increases are an attempt to utilise gold’s safe have characteristics in the face of some global monetary turmoil in the reponse to the COVID-19 virus pandemic.

To add to these big one- or two-off purchases, countries like India and Kazakhstan have been making monthly additions to their reserves for some time (India added 19.6 tonnes in the first half of the year and Kazakhstan 17.5 tonnes, and it is assumed that these monthly reserve increases will more or less continue for the remainder of the year).  Uzbekistan has also been making regular gold reserve additions (20 tonnes so far this year), while Turkey, also a somewhat erratic purchaser, has still added 20 tonnes of gold to its Central Bank gold reserves in the first six months of the year.

The apparent resumption of Central Bank gold purchases has not come before time.  The momentum seems to have deserted gold sentiment at what can be a weak period for precious metals.  Despite July and August being strong months for the past two years, historically this has not been the case in prior years, with the northern summer months proving to be some of the weakest months of the year for gold and silver.  However 2021 may be no ordinary year with the virus pandemic surging again in a number of Western and Asian nations with new more infectious variants appearing..  How this will affect markets is, so far, uncertain, with different nations (and different States in the U.S.) tackling the problem in different ways. 

Gold-backed ETFs also had a weak second half of 2020 with some major outflows recorded, although so far this year the gold ETF sector has been somewhat mixed, but is probably trending slightly weaker on balance.  The gold price’s reluctance to drop below the $1,800 level over the past couple of weeks has to give some comfort here, although this downwards resistance level has already been breached on several occasions, but so far the price has always bounced back.  The rest of July, and the whole of August, may thus set the pattern for precious metals prices for the year, and we hesitate to make any predictions.

Much will depend on the U.S. Fed and the interpretation of its nnouncements.  If it is seen to hold its nerve and doesn’t taper its QE or raise interest rates until at least the second half of next year, and perhaps beyond, we suspect  gold will strengthen, but probably only by a relatively small amount – and certainly not go to the $5,000 or $10,000 levels predicted by some ultra-bullish commentators.

Of course if more Central Banks add to their reserves signifinacntly in the second half of the year, and this is definitely a possibility, gold investorsentiment could receive a nice boost, but even so we doubt if $2,000 gold is in sight this year - but maybe next.

25 Jul 2021 | Categories: Gold, Silver, FOMC

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