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| By Sean Brodrick |
Central banks have spent the past three years loading up on gold.
And they’re likely not going to stop anytime soon.
The reasons why they are very bullish for gold … and not bullish at all for U.S. Treasurys or the U.S. dollar.
Swift action means you can protect yourself from this shift … and even profit from it, too.
So, what’s the scoop? Let’s start by looking at a chart of central bank gold purchases through last year.
A Change in Central Bank Buying Habits
You can see in the chart below that central bank gold purchases rose and fell between 2010 and 2020.
But it’s been “buy, buy buy” ever since, with a notable and sustained push starting in 2022.
So, what sparked this buying frenzy?
In 2018, the U.S. wanted to punish Russia because it had ...
- Poisoned Russian dissidents living in Britain.
- Hacked campaigns on U.S. infrastructure and electoral systems.
- Built a bridge to connect Russia with Crimea, which Russia illegally seized from Ukraine in 2014.
So, the U.S. sanctioned a slew of Russian oligarchs, officials and companies. This meant the U.S. used its currency as a weapon to make it difficult for certain Russian companies and the Russian state itself to do business.
Naturally, this made Russians — and others — aware that electronic currency is easily compromised.
Real wealth is something you can hold in a vault, like gold. So, select central banks began to stockpile the yellow metal.
Fast forward to 2022, and Russia mounted a full-scale invasion of Ukraine. In response, the U.S. cranked the sanctions up to 11! It blocked key Russian financial institutions to effectively freeze their U.S.-based assets, worth about $300 billion.
Additionally, several other banks were sanctioned, limiting Russia's access to international capital and financial services.
This was an eyeball-grabber not just for Russia, but for any country that might face the wrath of the U.S. over anything. If previous sanctions were a red flag, this was the code red alert that sparked immediate action.
Because their electronic dollar assets could be frozen, they needed something that Uncle Sam couldn’t freeze.
And that’s gold.
Ta-Ta to Treasurys
To pay for this gold rush, central banks decided to sell their Treasurys.
And you can see that the initial rise in gold purchases started well before the Russian sanctions. In fact, China was the first to decide to diversify its foreign exchange reserves back in 2013.
It sold Treasurys and dollars … and bought gold.
Then, foreign central bank Treasury purchases went sideways for a while as gold purchases remained on a steady rise.
That is, until Uncle Sam slapped those massive sanctions on Russia in 2022.
Once that happened, Treasury purchases dropped like a hot potato as central banks needed even more liquidity to load up on gold.
And while Treasury purchases have come off that 2022 low … they are nowhere near their pre-sanction levels.
Why Gold Will Get Even Hotter
The thing is this timing couldn’t be worse for Treasurys.
Because the U.S. seriously needs buyers. Now.
Last year, the U.S. Federal government issued roughly $10 trillion in securities. Of that, a whopping — $8.9 trillion is to roll over maturing debt. The remaining $1.4 trillion is meant to fund the annual deficit.
And this year, the Treasury needs to borrow about $2 trillion, a 42% increase from last year.
Which begs the question: Who’s going to buy all that debt?
Not foreign banks, that’s for sure.
Not after the U.S. declared an “America First” path forward on trade, and slapped tariffs on all our trading partners.
Remember, more tariffs mean less trade. Less trade means other nations have a lower need for U.S. dollars. And less need for greenbacks means those countries will hold fewer Treasurys.
To be sure, I don’t expect other countries to sell ALL their Treasurys. That would hurt their own investments.
But most of the Treasury holdings of foreign central banks have maturities of five years or less. All they have to do is let those Treasurys mature, then use the cash to buy gold.
All the while, the U.S is still in search for new buyers.
A Golden Opportunity Amid a Capital Drought
We’re potentially looking at a long-term capital drought that will undermine Treasurys and the U.S. dollar. And that is sure to boost gold.
My target on gold is $6,900 an ounce, for reasons I’ve explained before. But previously, I thought it would take several years for that to play out.
Now, we might get there faster.
So, what can you do?
Well, you can buy SPDR Gold Shares (GLD). It has a Weiss Rating of “B-” — which puts it in the “buy” category — and an expense ratio of 0.4%.
Even better, it holds physical gold.
You can see that gold and the GLD have trended higher nicely. Then, this year, gold and the GLD started accelerating!
If you bought GLD when I recommended it in my Jan. 8 Weiss Ratings Daily article, you’d be up 15.75%.
The S&P 500 is down about 6.6% over the same time.
And like I said, I believe gold can go much, much higher.
The good news is that nothing travels in a straight line. Gold will pull back. And that will be your chance to hop in.
So, get ready now. This way, you can protect yourself against dollar weakness and position yourself to ride the shiny yellow rocket that is gold.
All the best,
Sean
