BOE Gold Commands High Premium, Signals Central Bank Buying

Gold stored at the Bank of England has been selling for unusually high premiums recently, signaling that central banks may be back in the market buying.

Bullion in the Bank of England’s London reserves — one of the largest stashes in the world — is stored and sold on behalf of other central and commercial banks as opposed to being owned by the BOE itself. It usually trades within a few cents an ounce of the metal held at other London vaults run by commercial banks such as JPMorgan Chase & Co.

But in the past week, gold sold from the BOE has traded for as much as 50 cents above benchmark London prices, according to bullion traders. These premiums are at least in part being driven by buying from the Bank for International Settlements, which regularly trades the metal on behalf of the world’s central banks, a person with direct knowledge said, asking not to be identified because the information isn’t public.

The BIS bought as much as 1 million ounces of BOE metal from various commercial banks at a premium of 30 to 40 cents recently, one person said. The premium for gold at the BOE rose to as much as 50 cents an ounce late last week before tapering off to about 20 to 40 cents, according to bullion traders. That compares with a range of zero to 20 cents during normal circumstances, the traders said.

A spokeswoman for the BIS declined to comment, citing client confidentiality. The BOE declined to comment.

The buying may be a sign that one or several central banks are increasing their gold reserves, bullion traders said.

Gold Rally

Central banks helped underpin gains in gold prices for most of the last decade, but flipped to net sellers in the third quarter of 2020 as some countries cashed in on surging prices. Renewed buying could help sustain a rally in bullion, which on Tuesday recovered all its losses so far this year. The metal is on the way to its biggest monthly gain since July as investors fret about inflation and Federal Reserve officials signal steady monetary policy for now.

Since prices dropped early this year, at least some central banks have returned as buyers. In the past, sovereign lenders have bought gold to diversify their portfolios away from the U.S. dollar to safeguard their finances amid concerns over the Fed’s ultra-loose monetary policy, massive U.S. government spending and inflationary pressures.

Last month, the Bank of Thailand raised its gold holdings to 6.35 million ounces from 4.95 million ounces in March, according to data from the International Monetary Fund website. In March, Hungary tripled its reserves of the metal in one of the biggest purchases by a central bank in decades. Data from the World Gold Council showed global central banks were net buyers of bullion in February, led by India, which bought 11.2 tons.

Is Gold Set to Tear Even Higher? Four Key Charts to Watch

Just when the vaccine rollout and economic optimism left gold looking like last year’s metal, it staged a recovery.

Bullion is one of the best-performing commodities this month, erasing almost all of this year’s losses. Investors have been lured back by gold’s appeal as an inflation hedge, while the Federal Reserve maintains its monetary stimulus and says price pressures should prove temporary. Spot gold rose 0.4% on Friday, capping a fourth straight weekly gain.

Diego Parrilla, who runs the Quadriga Igneo fund, is among those who recently boosted their exposure to gold, saying that central banks won’t risk increasing interest rates to combat inflation for fear of “pricking the enormous bubbles” they’ve created.

“We have entered a new paradigm that will be dominated by deeply negative real interest rates, high inflation, and low nominal rates — an extremely supportive environment for gold,” said Parrilla, who manages $350 million.

Still, gold is ultimately a haven asset which conventional logic suggests should suffer as the economy booms. So can the latest rally be sustained? Here are four key charts to watch.

Inflation Conundrum

It’s been the hottest question in finance this year, and probably the biggest one for gold: will current inflationary pressures be transitory or persistent?

If you ask the Fed, the answer is the former. Parts of bond market disagree, with market-based measures of long-term inflation expectations rising to the highest since 2013 earlier this month.

That’s a sweet-spot for gold, which benefits when monetary policy keeps bond rates low even as inflation persists. Real yields on Treasuries have slipped deeper into negative recently, burnishing the appeal of bullion.

Where they go next will be critical. Any hint the Fed may taper because of inflation or labor market strength could see bond rates spike — triggering a repeat of the taper tantrum seen in the wake of the financial crisis, when gold dropped 26% in the space of six months.

“The position I think you get to is a place where it gets to be very vulnerable to the taper narrative,” said Marcus Garvey, head of metals strategy at Macquarie Group Ltd.

On the other hand, anything that drags on the global economic recovery — be it poor jobs data or new virus variants — should see real yields plunge, benefiting the metal.

Dollar Driver

The dollar has been another important driver of gold this year. After initially strengthening as the U.S. vaccination program outpaced the rest of the world, it’s declined since March as other nations closed the gap, providing a tailwind for the precious metal.

Most analysts don’t see much movement in the dollar going forward, with the median forecast compiled by Bloomberg suggesting only a slight strengthening.

If they’re wrong, be it due to divergence in the global recovery or surprising hawkishness from other nations’ central banks, the implications for bullion could be significant.

Investor Demand

Gold’s poor start to the year came as exchange-traded funds cut their holdings of the metal by 237 tons in the four months through to April. Hedge funds trading on Comex also reduced their exposure to the lowest since 2019 in early March.

In the second quarter, flows have started to reverse. If that picks up steam, gold could find another leg higher.

“There is still potentially a lot of pent-up investment demand,” said Ole Hansen, head of commodity strategy at Saxo Bank A/S. “Still, positions are relatively small.”

Others, including Aegon NV’s Robert Jan Van Der Mark, who cut his exposure to gold in November after vaccines were announced, remain to be convinced.

“With vaccination rollout on track and economies reopening, we have less appetite for a safe haven/stagflation type of assets in the portfolio,” he said.

Bitcoin Bounce

Often touted as digital bullion, Bitcoin’s rally in the first months of the year was demoralizing for gold bulls. The two assets are both favored by those fearful of hyperinflation and currency debasement, so the cryptocurrency’s outperformance may have turned the heads of would-be bullion buyers.

Bitcoin has dropped about 40% from its mid-April high, with substantial outflows from funds. Gold could be a beneficiary.

BOE Gold Commands High Premium, Signals Central Bank Buying via @goldsilverrepor
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