Central Banks Load Up on Gold: A Revealing Perspective

If financial history teaches anything, it's that the most intense buying happens near a top. Likewise, climatic selling happens near a bottom.

In other words: The crowd is usually on the wrong side of major financial turns.

Government is the "ultimate crowd," because every decision is made by committee. By the time a government is ready to act, it's almost always too late. So, they're typically the last to act on a trend.

Consider gold. This chart is from our June 2011 Global Market Perspective, which noted:

Central banks are now expanding their gold reserves for the first time in a generation. This behavior is the exact opposite of their action at gold's low in 1999-2001. Back then, the Bank of England was selling its gold reserves, as were 14 other European central banks. At the 1999-2001 gold low, prices had already declined for 20 years, so government officials felt confident enough in the trend to dump gold reserves. Now that gold has risen for ten straight years, central banks again feel comfortable in extrapolating the trend forward and are buying gold. Their purchases became particularly pronounced as gold was meeting the upper channel of the five-wave rally from the 1999 low. Our view remains that gold is forming a major top.

Just three months later (Sept. 2011), the price of gold did indeed top at $1921.50, an all-time high.

World central banks bought more gold in 2012 (Bloomberg, April 24, 2013):

The World Gold Council says [world central banks] added 534.6 metric tons to reserves in 2012, the most in almost a half century.

Yet, the price of gold continued to decline, reaching a low of $1046.20 in December 2015.

As you probably know, gold's price has risen substantially since then.

And, now, with the precious metal near multi-year highs, the "ultimate crowd" is jumping in with both feet again.

Here's a chart and commentary from our January 2020 Global Market Perspective:

This chart shows that the world's central banks are at a 50-year high in annual net gold purchases, nearing 700 tons. Central banks were net gold sellers for nearly the entire rally, from the 1999 low until 2010; then they suddenly reversed course and became net buyers shortly before the peak at $1921 in 2011. They've been buying ever since, even though gold remains below its 2011 peak. Central banks are committing even more to gold now.

Some observers may view all this buying as a bullish sign for gold. However, as we've learned, central bank buying does not determine the price of gold. If anything, central banks buy or sell at precisely the wrong times.

The real driver of gold's price is investor psychology, which is reflected in the Elliott waves of gold's price chart.

Learn what our global Elliott wave experts anticipate next for gold by reviewing our in-depth Global Market Perspective, 100% risk-free. Just follow the link below.