*By Christophe Barraud, Chief Economist & Strategist at Market Securities
According to TrackInsight data, investors kept accumulating “Gold” ETFs with cumulative inflows hitting a new YTD high. Global accommodative monetary policy coupled with trade and geopolitical uncertainties (U.S. protectionist policy, Middle East/South China sea tensions, Brexit, etc…) have added pressure on investors to seek out gold-backed ETFs and on central banks to build gold reserves.
Money has been pouring into gold as investors seek to protect their wealth amid mounting concerns of slowing global growth that are seen supporting monetary easing from central banks in both developed and emerging countries.
Central banks are expected to remain particularly accommodative in the short term after the U.S. Federal Reserve cut its rates for the first time since 2018, making non-interest bearing bullion more competitive against other assets. Moreover, the Fed also opted for early termination of the balance-sheet unwind, which was due to run to completion in September. It implies that the balance sheet of central banks in developed countries should rebound in 2H19, especially in a context where the ECB could restart its asset purchase programmes in 4Q 2019 while its third iteration of TLTRO is due to start in September.
Trade disputes initiated by the U.S., tensions in South China Sea, Middle East and Brexit have also pushed investors to use gold as an hedge against geopolitical tensions that could affect negatively risky assets. Furthermore, gold is more and more used as a store of value to the extent that several banks plan to levy a negative interest rate on clients who deposit large amounts on their bank accounts.
Separately, data released by the World Gold Council showed central banks bought 374 tonnes of gold in the first six months of the year (the largest net 1H increase in global gold reserves in the 19-year data series). Looking at the details, Poland bought 100 tons in the second quarter, the most by a central bank since India’s purchase in 2009, reflecting a general trend to diversify reserves.
Finally, the FT underlined that the shift in attitude towards gold was highlighted by a “European Central Bank decision last week to cease an agreement to limit sales of gold, as the region’s institutions are no longer selling it in large volumes and are instead now net purchasers”.
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