Why Central Banks Aren’t Listening to Warren Buffett on Gold

Highest central bank buying in 50 years

According to the gold demand trend for Q4 2018 released by the World Gold Council, central banks are on the biggest gold (GLD) buying spree in the last 50 years. Central banks bought a total of 651.5 tons of gold in 2018, the second-highest total on record.

Why Central Banks Aren’t Listening to Warren Buffett on Gold

Central banks buying gold

As usual, the central banks of Russia (RSX), Turkey, and Kazakhstan led the pack. These three banks accounted for 58% of total central bank demand in 2018, down from 94% in 2017. Russia purchased the most gold on record at 274.3 tons during the year. These purchases were mostly funded by the sale of US Treasuries (SPY). Russia is in the process of de-dollarization (USDU) by selling US Treasuries (AGG) and buying gold (NUGT) (GDX) instead.

The breadth of purchases by central banks has also increased with unconventional buyers entering the market. The Reserve Bank of India (INDA) increased its reserves by 40.5 tons, the most since 2009. While European countries (HEDJ) are usually sellers of gold rather than buyers, some European central banks also jumped on the buying bandwagon in 2018.

Rising uncertainties to push central banks towards gold

As we discussed in Bulls versus Bears on Wall Street: Time to Buy Gold in 2019? many investment banks including Credit Suisse (CS) and Goldman Sachs (GS), have also listed central bank buying as one of the factors driving gold demand in 2019. Goldman Sachs analyst Jeffrey Currie thinks that rising geopolitical tensions should incentivize “more central banks to re-enter the gold market.”

So, while Berkshire Hathaway (BRK.B) chair Warren Buffett might not like gold and advocates that investors should not hold it, central banks might just keep on hoarding more and more of the metal, driving substantial gains for good.