What’s Happening with Gold?

Besides gold (XAUUSD) looking ready to break above $1,800 (currently trading at $1,781), investors were struck lately with some bizarre news in the world of the yellow metal. Known as a safe-have that protects investments and has a crucial role in any portfolio, gold is highly regarded, especially in countries where the population has lost faith in monetary policymakers.

Something unusually happened last month, leading many to question the reason for such a move – for three consecutive months (more or less since the coronavirus pandemic outbreak), Switzerland has delivered over 220 tons of gold to the United States. One can only wonder – what is the hurry, as the sudden interest changes an almost a decade long trend.

Who Is Buying Gold and Why?

Gold is the only form of money that survived for millennia. It worked most of the time as a medium of exchange and, up until 1971’s Nixon Shock, it was responsible for international price stability as the world could exchange fiat currencies against gold at the US Treasury. When the gold window closed, the fiat currencies began free-floating.

So what happened with the price of gold? Who is buying, and why?

To start with, investors are keen to diversify their portfolio. Nowadays, you can own physical gold or paper gold. Physical gold can be acquired online, and the seller keeps it safe in a vault against a commission. The drawdown is that in times of crisis, like right now, it may be difficult to reach for your gold, either to keep or sell it.

Paper gold refers to owning shares in ETFs that track gold miners worldwide. It is like owning a piece of the gold producing companies, a piece that can easily be liquidated should the need arise.

Central banks also buy gold. Despite gold losing its status in the central banking world after all economies dropping the gold standard, central banks are avid purchasers and holders of gold.

This interest in the curious yellow metal from central banks sparks the curiosity of many investors as to why central banks fight to hoard it? China, for instance, is an avid buyer in the last decade.

This chart helps explain why. A quick look at gold’s performance since the 1971 Nixon’s Shock, reveals that gold outperformed all major asset classes if we account for inflation too. Or, inflation protection is the main purpose why investors prefer gold – no other asset throughout history preserved wealth as gold did.

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