Gold Strengthens on Central Bank Moves

Wed, Jun 19, 2019 - 1:51pm

Financial commentators typically hold a lukewarm view of gold, but its fundamental conditions are rapidly evolving. Financial Sense Insider spoke with Ronald Stoeferle, fund manager at Incrementum AG in Lichtenstein and co-author of the In Gold We Trust report, about his perception of gold and how markets are likely to shift.

Gold Making Moves

The strength in gold over the past month has taken almost everyone by surprise, Stoerferle stated. The likely catalyst for this move started when St. Louis Fed President James Bullard said an interest rate cute may be warranted soon and with Fed chair Jerome Powell also making a dovish tilt towards easing. Recent Fed papers also made the case for negative rates earlier this year. Both factors are likely playing into gold's strengthening trend since 2018.

At some point, Stoeferle noted, faith and trust in central banks will be tested again. Highlighting this possibility, he added, we’ve seen institutional demand for gold kick in recently (see podcast: Three Reasons You Should Be Thinking About Gold).

gold price
Source: Stockcharts.com. Note: Past performance is no guarantee of future results. You cannot invest directly into an index.

Gold currently has a massive resistance zone at 1352 to 1370, which will be tough to overcome. Once that resistance is breached, Stoeferle believes we will see increasing inflows from institutional investors, followed by higher prices to around 1450 to 1500 probably within a couple of weeks.

“There's lots of money coming in from the sidelines,” Stoeferle said. “This is exactly what we described in the In Gold We Trust report. We said that institutional demand will really be the tipping point or the factor that moves the needle. And we are seeing that so many players used to be on the sidelines.”

Pervasive Deterioration of Trust

There’s little doubt that public trust is deteriorating, from complaints about fake news to distrust of science and the rise of populist political candidates pointing to distrust of social institutions. Trust, Stoeferle noted, is vital to our societal, financial and monetary systems.

Young people are losing trust in democracy, Stoeferle noted. Only one in five people still have confidence in banks, religion, or big business and only one in 10 have trust in the government. As this plays out—especially in the monetary sphere—he expects gold to rise in tandem.

“The loss of trust is not a short term trend,” Stoeferle said. “This is something that concerns me quite a lot... at some point people will lose trust in central banks, in the economy and in money.”

Not only is this being reflected in trade tensions between the world's two largest countries, but also with so-called "surveillance wars," as one of the world's foremost geopolitical experts, Peter Zeihan, recently noted.

Central Banks Buying Gold

Steady gold buying and repatriation of central bank gold indicates growing mutual distrust among central banks, Stoeferle said.

China has also started publishing its gold purchases on a monthly basis, which is interesting considering the ongoing concerns over trade wars, Stoeferle noted. Additionally, individual Chinese citizens are accumulating gold at a rapid pace.

central bank gold purchases
Source: In Gold We Trust Report

The usual gold buyers, including Russia, China, Iran and Turkey are still acquiring it. However, other countries from the European Union, such as Poland and Hungary, recently bought gold. Emerging markets are accumulating at increasing rates as well.

The trend toward de-dollarization also highlights this issue. It is important to note that gold isn’t actually underperforming in other currencies, Stoeferle noted. It is trading at all-time highs in several currencies, including the Canadian and Australian dollars and in many emerging market currencies.

“We've seen the highest demand coming from central banks since 1971,” Stoeferle said. “This is a clear sign that governments and central banks are losing trust in the U.S. dollar and in the international monetary architecture. … I think this is really an important shift that we're seeing. If you traveled to China or in India, you will feel, you will smell, you will see, how important physical gold is for those countries.”

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