Gold Belongs in Central Bank Portfolios – and Yours, Too

Gold Belongs in Central Bank Portfolios – and Yours, Too

By Adam Trexler, President and Founder, Valaurum®

The world’s central banks—the government bodies tasked with managing their countries’ monetary policies—have been on a gold-buying spree for the past decade. Today, the gold held in central banks’ reserves totals more than 30,000 tons. Even though deficit pressures caused by the Covid-19 pandemic required some central banks to sell modest amounts of gold in the third quarter of 2020, central banks have been net buyers of gold for the year-to-date, adding 220.6 tons to their holdings.

Why do central banks still insist on owning gold? After all, the US dollar and other world currencies have not been tied to a gold standard for many years. Central banks, which are led by fiscal experts with access to vast amounts of economic data, amass gold for the exact same reason individual investors do: Because they want to hold an asset that will maintain its value in times of crisis.

Gold is well-known to be a stable investment that can protect against risk during periods of uncertainty and market volatility. It is a hedge against the possible weakening of currencies or other assets, or the ravages of inflation. Gold is also a highly liquid asset, and one that enables central banks to diversify their holdings beyond government instruments and currencies. In short, central bankers believe gold will keep its value regardless of the health of the underlying economy, and they view their gold reserves as a source of confidence for the country’s citizens.

If the leaders of central banks see the wisdom of owning gold, it seems clear that individual investors should consider doing likewise. In fact, they are doing precisely that, as shown by a few recent trends:

● Investor demand for gold bars and gold bullion coins rose 49% in the third quarter, compared with the year ago period.

● Holdings in gold-backed exchange traded funds (ETFs) hit an all-time high in Q3 2020, and gold-backed ETFs have now had net inflows for eight straight quarters.

● Gold futures surged to a record earlier this year, and while they have backed off somewhat, they still stand at nearly $1,900 an ounce, which is close to the prior historic high set after the Great Financial Crisis of 2007-2008.

However, there are some challenges for investors who want to add gold to their portfolios. At today’s prices, buying gold bars or coins may not be feasible for many individuals. Gold-backed ETFs are more affordable, but they don’t allow investors to hold gold physically, as central banks do.

One solution to these challenges is the Aurum®, which allows investors to buy gold in small, affordable increments. An Aurum is a thin sheet of gold—in quantities of one gram or less—safely encased in layers of polymer film. The result is a note that is similar in size and thickness to a US dollar bill. The Aurum enables individual investors to own physical gold in an economical, portable and exchangeable form. Because investors can purchase Aurum in small increments, they can also build a position in gold gradually, similar to putting away a few dollars each week in a savings account.

Today’s economic environment is marked by the continuing impact of Covid-19, monetary policies that have led to near-zero interest rates, and concerns about the volatility and valuation of equity markets. In this perfect storm of financial uncertainty, central banks and small investors alike are turning to gold as a safe harbor.