CENTRAL BANKS SWITCH FROM FOREIGN CURRENCIES TO GOLD RESERVES
Gains in stocks eased Thursday, but industrial metals traded south, and crude oil eased despite a tense geopolitical environment, as fears such a rise in energy and commodity prices would surely curb economic growth and slow global demand than supply tightening. The Central banks are increasingly concerned about inflation, and major banks are beginning to signal that they will not let inflation get too high, even if it means slowing growth. Christine Lagarde Announced Thursday That The European Central Bank Is Ready To Take “Any Action Required To Monitor Price Stability And Protect Financial Stability” In Europe. Inflation In The Us Rose To 7.9% In February As Expected, And This Figure Does Not Take Into Account The Recent Surge In Energy And Commodity Prices Due To The Ukraine War.
In commodities, gold’s potential upside is more than just a safe hedge, As Heightened Geopolitical Tensions And Recent Sanctions Against The Russian Central Bank Will Cause Central Banks Around The World To Reconsider Their Foreign Exchange Holdings, And Begin To Shift Toward Homeless Gold. The price of an ounce fell below the $2000 level, however the pullback in prices can be seen as interesting buying opportunities for those betting that it is time for gold to shine again. Inequality, high market volatility and limited visibility make it difficult to give a clear forecast however Chinese stocks continue to suffer badly, with the outlook getting worse day by day.
Gold Has Been A Key Component Of Nations’ Financial Reserves For Centuries, And Its Appeal Shows No Sign Of Abating, As Central Banks Are Set To Become Net Buyers Of Gold Again This Year. In fact, central banks now own more than 35,000 metric tons of the metal, which is about one-fifth of the total metal. But what makes gold a major asset for so long?
One of the primary roles of gold for central banks is to diversify their reserves. Banks are responsible for their nations’ currencies, but can be subject to fluctuations in value depending on the perceived strength or weakness of the underlying economy. In times of need, banks may have to print more money, because interest rates, the traditional lever of monetary control, have been stuck near zero for more than a decade. This increase in the money supply may be necessary to stave off economic turmoil but at the cost of currency devaluation. By contrast, gold is a finite physical good to which supply cannot be easily added. To that effect, it is a natural hedge against inflation.
Since gold does not carry any credit or counterparty risk, it acts as a source of confidence in any country and in all economic environments, making it one of the most important reserve assets worldwide, along with government bonds. The inverse relationship of gold to the US dollar, another major reserve asset, is an additional element to its appeal. When the value of the dollar falls, gold usually rises, which enables central banks to protect their reserves in times of market volatility. The picture of more active central banks has changed, with traditional economic powers such as the United States, Germany, France and Italy no longer buying more gold, but instead holding the large holdings they already own.