In 2104 the world’s central banks purchased a total of 447 tons of gold. That’s the second biggest year for buying gold in the last 50 years. And it represented a 17% increase on purchasing in 2013.
After all, the price of gold has been falling over the last year. So why would banks want to buy something with a falling value? On the surface, it makes no sense.
But it does make sense when you understand that this massive purchase of gold had little, if anything, to do with the price.
That buying frenzy wasn’t about the price, or even the gold market.
It was about low or negative interests rates.
In other words, when cash is no longer in a position to generate much in the way of interest, why bother keeping it in the bank?
Better still, if the global banking system is in such poor shape that some banks are now in negative interest rate territory, why not buy some gold as an insurance policy?
I have written before about using gold as insurance.
When you buy gold you are putting some wealth to one side. Out of sight and out of mind.
During normal times (remember those?), there is an opportunity cost to putting your money into gold. After all, if the gold price remains more or less flat, and you could have been making 5% on the money sitting in the bank, then you are losing 5%. That’s the cost of your insurance.
But today, with zero or negative interest rates, there is no opportunity cost. Leaving cash in the bank won’t pay you a penny. In fact, you’ll be losing money.
This is why central banks have been buying so much more gold. It’s not about the price of gold. Nor is it about anticipated movements in the gold market.
Remember, gold has something important in common with cash. It is liquid. And central banks need that liquidity right now. They need to be able to get their hands on money in a hurry. And turning gold into cash happens a lot faster that collecting debts from Greece, for example.
Banks need liquid assets. And in times of zero interest rates, gold works better for them that cash on deposit.
It’s all about insurance…putting some of your wealth into gold so that, like the banks, you can convert it into cash if you need to.
Why gold and not stocks, where returns can be much higher?
It’s not about “either or”. It’s about diversification and insuring yourself during uncertain economic times.
By all means ride the stock market for now. But for safety, put some of your wealth into gold.
And right now is a great time to buy some more.
About the author: DH Kenrick is a student of world economics and a committed gold enthusiast. Follow me on Google+
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