In early April, global prices for 1 troy ounce of gold hit the second-highest point in history — $2,041.30, which is just 2% below the previous $2,069.40 record level — and precious metal firm Lear Capital’s Kevin DeMeritt says more gold price growth could be in store.
Interest in the asset in recent months has undoubtedly been fueled by several factors, including central banks’ notable 2022 gold buying spree. Last year, the demand for the precious metal was the highest it has been seen since 1950. Central banks collectively purchased 152% more gold than in 2021, marking a new record, according to the World Gold Council.
In 2023, their enthusiasm for the asset has remained considerable. Central banks’ gold reserves rose again in both January and February — part of an ongoing trend, according to Kevin DeMeritt, involving the most robust central bank buying patterns we’ve seen in several decades.
“They purchased a quarter of all the mining supply [in 2022] — which is a huge jump from [their previous activity],” he says. “They’ve continued to buy into 2023. The last time we saw this kind of purchasing was back in the early ’70s.”
Gold’s Lasting Allure
In the past, U.S. Treasury securities were a popular investment choice among numerous countries and private investors — sometimes, according to the nonprofit Peter G. Peterson Foundation, because they were viewed as a safe type of investment, due to the U.S. government’s involvement.
In 1970, the amount of federal debt held by foreign lenders equated to approximately 5% of the $283 billion debt total. Foreign debt holdings increased significantly for years, eventually hitting 48.5% in 2011 before moving in the opposite direction. In recent years, external Treasury securities holdings have declined in response to elements such as the Federal Reserve’s efforts to purchase debt to offset the COVID-19 pandemic’s impact on the economy.
Instead of snapping up U.S. debt, a number of countries — including some that had previously been considered to be significant Treasury security holders — have transitioned to a more gold asset-based investment approach.
For the first time in more than a decade, China, previously one of the largest foreign U.S. Treasury securities holders, decreased its debt holdings to below $1 trillion in 2022. The People’s Bank of China had been a notable gold buyer between 2002 and 2019; in late 2022, it registered its first gold reserve growth in three years, securing 62 metric tons, which brought its total stored amount up to more than 2,000 metric tons, a new milestone for the bank.
Russia, which has added more than 1,900 tons of gold to its reserves since 2005, has also reduced its U.S. debt ownership in recent years. During a two-month period in 2018 — the last year the country was listed as one of the top foreign Treasury securities holders — it slashed its Treasury-related holdings by 84%.
The Upside of Gold Assets
Due in part to economic imbalances between nations and the growing amount of money in circulation, the U.S., along with other countries, stopped backing paper currency with gold decades ago.
While currency value is now determined by factors such as market forces, numerous central banks have continued to recognize gold’s value and amass reserves of it to diversify their portfolio.
Gold can be particularly helpful in that aspect because it’s historically been less reactive than quite a few other types of assets during turbulent economic periods. As the cost of living soared last year, purchasing gold may have made sense to central banks, Kevin DeMeritt says.
“That’s going to offset some of the inflation pressure on paper debt they hold,” he says. “Gold is often seen as a pretty good hedge against inflation and tends to rise when the purchasing power of the dollar declines. The last time we saw inflation rise [to its recent level] in the ’70s, gold was up over 500%.”
Gold offers another important advantage: liquidity. Its consistent value allows the asset to be sold fairly easily; if central banks ever need to quickly raise capital, having the precious metal on hand can be helpful.
In addition, having robust gold reserves can, as Lear Capital notes, potentially help position central banks as reputable organizations by indicating to investors and other entities they have a stable source of funds available to tap into if economic issues arise.
A Bright Outlook for Precious Metals
If the recent stock market volatility, interest rate increases and other challenging conditions persist throughout this year, central banks may continue to turn to gold as a source of stability, according to Kevin DeMeritt.
“The economic uncertainty right now is going to be a big factor,” the Lear Capital founder states. “If a recession takes hold [and] we start to see more of these financial instabilities happen around the country — and probably around the world — demand from central banks could intensify, along with demand from institutional and individual investors.”
Given gold’s past performance, compared to the stock market’s, Kevin DeMeritt says investors may want to consider including it in their portfolio.
“If you invested $80,000 in stock and $20,000 in gold in the year 2000, [that investment] would [have been] worth $385,000 by 2022,” he says. “By [making] gold [just a fifth] of [your overall investment], you [would have earned] $65,000 [more than by investing in stocks alone].”
(To view what effect including precious metals in a portfolio can have firsthand, use Lear
Capital’s IRA portfolio comparison calculator to create a graph outlining the potential returns from investment plans with and without gold or silver assets.)
As investors look for a buffer against cost constraints like higher interest rates, the interest in gold and other precious metals — and their price — could pick up.
“Gold is used as a safe haven during recessions, market volatility, war,” Kevin DeMeritt says. “When investors are worried about the economy — like we’re seeing now with bank failures or the war in Ukraine — usually you get more people turning to gold, which can drive up its price. We’re seeing tremendous demand; that trend is going to get more intense. You might just wake up to $3,500 [or] $3,700 gold [levels] in the next 24 [to] 36 months.”
[EB1]AP suggests using this instead of tonnes, which is what’s listed in the link. (These stats are from the article linked to in the second paragraph.)