Central banks are loading up on gold

Jonathan Garber

May 11, 2016, 05:05 IST

2016 has been a great year for gold.

The precious metal is up 19%, and recently crossed $1300 per ounce for the first time in 15 months, before pulling back into the $1265 area. One of the most encouraging signs for the yellow metal is that demand has come from all sorts of places.

Buyers have come back into the market in India, the world's largest buyer of gold, after a strike by the country's jewelers associations brought business to standstill. In the US, demand for bullion is the strongest it's been in 30 years.

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But it's not just everyday people who are scrambling to get their hands on the precious metal. Central banks are loading up as well. Data from the World Gold Council showed central banks scooped up a net 45 tonnes of gold during the first quarter. According to Capital Economics' Commodities Economist Simona Gambarini, central bank demand in the first quarter climbed 28% versus a year ago.

Of the buyers, Russia (+46 tonnes), China (+35 tonnes), and Kazakhstan (+7 tonnes) were the most active in the market, Capital Economics says. As for why the central banks are buying, here's Capital Economics (emphasis theirs):

The primary driver of central banks' gold buying continues to be diversification away from the US dollar with some also looking for a hedge against currency volatility more generally. Indeed, historically gold is negatively correlated with the US dollar, the main asset held by central banks across the world, making it an effective hedge against future dollar weakness. What's more, gold tends to have little or no correlation to other traditional or alternative reserve assets, like government bonds.

Going forward, Capital Economics thinks "the upbeat Q1 figure is in line with our view that the official sector will continue to be a steady source of demand for gold, helping to underpin our positive view on prices."

Capital Economics isn't the only one who has a positive view on gold. In a mid-April note to clients, Murray Gunn, HSBC's head of technical analysis, noted gold is "in an uptrend with a bullish Elliott Wave structure."

At the time, Gunn suggested, "With momentum turning up we open a long position at a spot reference of $1,260. A stop-loss is set at $1,200 with an initial target of $1,500."