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Why Are Central Bankers Nervous

One of the best charts of this past week came from the World Gold Council.  The figure (Figure 1 below) shows the change in demand for gold across the world by select buyers.  One of the buyers categorized by the World Gold Council is “Central banks & other institutions”.

Before looking, would you that central bank demand increased or decreased?

Fascinatingly, of the six categories reported by the World Gold Council, the top buyer – when measured by the percentage change in demand in the first quarter of 2019 compared with the first quarter of 2018 – was central banks.  

Central banks increased their holdings by a whopping 68%, from 86.7 tonnes to 145.5 tonnes.  

Of the speculations one could guess at, one that should be on everyone’s mind is this: What is going on in the minds of central bankers?  Figure 1 has the reason for the question.  

Central bank demand far surpassed the second place demander – exchange-traded funds and similar products – by almost 20%.

Are central bankers simply jittery?  What is it they know that we don’t?  


Why Are Central Banks So Gung-Ho About Gold?
What is going on in the minds of central bankers?  Lots of reasons could be behind the rise – two seem most prescient.  Central bankers are jittery because they are either concerned about the global economy and they are concerned about geopolitical tension.

These two reasons make simple sense.  The global economy was in no way booming in the first quarter of 2019.  Rather, central banks appeared concerned about the overall state of the global economy.  Some economists have even called the first quarter of 2019 as the third “mini-recession” of this incredibly long expansion.  In addition to jitters about the state of the global economy, there was also (and continues to be) concerns about how growth is performing in the European Union.  The European Union is dealing with Brexit as well as some weak economic performance in some of the areas largest economies, such as Germany.

What Areas Are Buying Gold?
With this background, what areas across the globe are actually buying gold?  

Fascinatingly, on top of the list of the largest percentage increase in demand for gold is the United Kingdom.  Compared to the first quarter of 2018, demand for gold grew an amazing 58%.  Brexit may be largely responsible for this massive growth.

Far behind the growth in the U.K. are three countries with double digit growth: the United States (+38%), Canada (+37%), and Turkey (+25%).

The country with the largest drop in demand was Mexico, down 56% over the prior year’s quarter.

Overall, demand for gold is increasing around the world.  Central banks have the jitters, as do individual consumers.