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Could Central Banks’ Demand for Gold Rise?

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Central banks’ gold demand could rise

The US federal debt is growing at a fast rate—it has even exceeded the GDP growth rate. Trump’s win of the election in November came as a surprise for investors. Gold increased initially, but later, it tumbled. The fall since Trump’s victory has been significant and affects gold-following funds such as the iShares Gold Trust ETF (IAU) and the Physical Swiss Gold Shares ETF (SGOL). When major central banks increase debt as a percentage of GDP, their gold holdings often rise.

Rising debt has an adverse impact on the economy. Anything that is negative for the economy could be positive for gold. In turn, anything positive for gold could be value-adding for mining shares such as Barrick Gold (ABX), Goldcorp (GG), Yamana Gold (AUY), and Coeur Bank (CDE).

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Increased spending

According to Valuewalk, the US debt is $67 trillion, nearly 400% of GDP. Investors can compare GDP versus debt to understand whether the country can make its future payments. Trump is planning to increase the country’s spending on infrastructure, which may add to the nation’s debt. Higher debt is also negative for the US dollar, and a fall in the dollar could trigger an increase in gold prices, as gold is a dollar-denominated asset.

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