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(Kitco News) - June is proving to be a disappointing month for gold and silver as prices continue to hover near their lowest levels since early March.
Gold, in particular, is struggling as central banks worldwide are raising interest rates. While everyone is focused on the Federal Reserve and the U.S. dollar, we should note that the Bank of England surprised with a 50 basis point move this past week. At the same time, Norway's central bank raised interest rates by 50%, and the Swiss National Bank hiked by 25 basis points. To support its failing currency, even Turkey raised interest rates to 15%.
Global bond yields are rising, which creates headwinds for gold as it does not offer investors a yield. However, there is also another side to this international hawkish stance. According to some analysts, it will continue to provide long-term support for gold.
In an attempt to cool inflation, central banks are aggressively raising interest rates to slow the economy. Central bank officials are just hoping that they can cool inflation before they break something and push the global economy into a recession. However, there are a lot of investors and analysts who think that an engineered soft landing is a little too optimistic. Even central banks have admitted that monetary policy is not a surgical tool but a blunt instrument.
According to strategists like George Milling-Stanley, chief gold strategist at State Street Global Advisors, the real threat of a global recession will continue to support long-term gold prices, even if they correct lower during the summer. In an interview with Kitco News, Milling-Stanley said that investors should focus on gold's long-term role in a portfolio and not its short-term opportunity costs.
If you are wondering how real demand for gold is, you have to only look at what is happening in South Korea. Consumers can buy gold through a vending machine, and sales are surging.
According to GS Retail, the company that operates convenience stores and vending machines, $19 million in gold has been sold this year. The company plans to put its vending machines in 50 of its stores by the end of the year.
"People in their 20s and 30s appear to be the main buyers, purchasing physical gold as an investment vehicle, especially in times such as these, when its value is continuing to rise," a GS Retail representative told UPI News Korea.
Along with retail investors, central banks continue to see insatiable demand, with Poland pushing its reserves to record levels. Poland's central bank bought 19 tonnes of gold in May after it added 15 tonnes in April. The central bank now holds 263 tonnes of the precious metal in its foreign reserves.
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| Gold bulls should focus on long-term protection, not short-term opportunity costs - State Street's George Milling Stanley |
Other central banks that bought gold in May included: the Reserve Bank of India added 2 tonnes of gold to its reserves; the Czech National Bank bought 1.8 tonnes of go; Russia increased its reserves by 3.1 tonnes and Kyrgyz Republic's central bank bought 1.5 tonnes of the precious metal, according to data from the International Monetary Fund.
In an interview with Kitco's Anna Golubova, Leigh Goehring, managing partner at Goehring & Rozencwajg, said that the U.S. dollar could be on the verge of losing its reserve currency status.
“The monetary regime changes in 1930, 1968, and 1998 were hugely stimulative for commodity prices, and we believe the monetary regime change that will take place this decade will be no different," Goehring said.
Leigh added that central bank gold demand will cause gold prices to blow through $2,000 an ounce.
As to how much gold central banks will buy, Tavi Costa, portfolio manager at Crescat Capital, said that historically gold represented about 40% of global reserves; today, that number is about 15%. He noted that central banks would have to buy about $3.2 trillion worth of gold to boost levels back to where they were 40 years ago.
On that optimistic note, have a great weekend.
