Global central banks are actively selling US dollars and increasing gold holdings. As the Federal Reserve implements its third rate cut this year, the precious metal has become the ultimate "uncertainty hedge" amid rising dollar risks. The rally won't stop unless uncertainty subsides. Key highlights:
- Central bank demand for hedging dollar exposure dominates gold demand, helping prices stabilize above $4,000/oz. - Compared to historical levels, central banks remain underweight gold. Non-monetary investors show even greater underpositioning. - Mean reversion favors gold in today's risk-laden environment, with Fed policy, real rates, and inflation all mired in uncertainty. - Other precious metals are now playing catch-up.
**Uncertainty, Not Inflation, Drives Gold** The 25-year gold bull market saw accelerated price growth starting in 2022. Why?
While many view gold as an inflation hedge, its biggest rallies occur when price pressures ease. Gold stayed flat during the 2020-2022 inflation surge. Instead, central bank purchases show stronger correlation. World Gold Council data reveals annual central bank buying in the first ten months has grown substantially over four years.
This shift began after Russia's 2022 invasion of Ukraine, when frozen Russian assets (including central bank reserves) prompted BRICS nations to seek dollar alternatives. With the US reducing Ukraine aid and Europe feeling vulnerable, frontline states like Poland are accumulating gold. Even the ECB discourages member states from selling reserves.
**Persistent Underweight Status** Economist David Rosenberg maintains overweight gold exposure in model portfolios, citing central bank demand as key. Though tactically reducing some holdings, he remains bullish.
Central banks now recognize gold's underweight status, Rosenberg notes. The bull market began in late 1999 when gold comprised just 10% of reserves versus a 35% historical average. Currently at 25%, October saw multiple central banks buying over 1 tonne each.
This creates supply-demand imbalance: annual supply grows 1% versus 2.5% demand growth. Despite record ETF holdings and retail buying in markets like Thailand, gold represents just 1% of global portfolios—far below the 25% seen in early 1980s.
**Silver's Catch-Up Potential** While gold serves as reserve assets, platinum, palladium and silver offer portfolio diversification with industrial uses. Gold's price premium over silver has narrowed from 100:1 at peaks to 70:1, suggesting silver's rally has room to run.
Silver doubled from COVID lows by August 2020 before declining until last year's tariff-driven rebound. Trade uncertainties and commodity security concerns—like rare earth disputes—support strategic stockpiling of industrial metals.
**Fed Policy Divergence** The Fed's dovish stance contrasts with other central banks. Likely next Fed Chair Kevin Hassett advocates deeper cuts while others signal hikes. Historically, such policy divergence has been rare over 25 years.
Even if the Fed pauses cuts, monetary and inflation risks already favor gold's upward trajectory.
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