News has been coming through in recent weeks of different central banks selling off some of their gold reserves in order to have the liquidity they need to shore up their currencies or purchase energy during this time of geopolitical turmoil in the Middle East. While that selloff has taken some steam out of bullion’s bull run, many analysts say this could be setting up the metal for its next climb upwards.
SPI Asset Management’s Stephen Innes published an analysis on Monday in which he explains why recent gold liquidations by central governments like Turkey and Russia are actually good signals for the future price movement of the precious metal.
He says there was panic when the Iran war broke out, triggering disruptions to shipping through the Strait of Hormuz, causing oil prices to spike, and stoking inflation fears. These conditions forced many central banks to sell some of their gold reserves in order to have the liquidity needed to keep their economies functioning.
Gold prices have retreated significantly since the war started, but Innes says investors who think that gold’s bull run is over are mistaken.
He says the economic shocks triggered by the war in Iran will take a long time to resolve. Shipping is unlikely to stabilize very quickly, and geopolitical relationships are likely to change in ways that didn’t exist prior to this war. Under these changed global circumstances, gold is increasingly becoming an asset used to guard against the weaponization of international payment systems like SWIFT.
Additionally, fiat currencies are vulnerable to sanctions threats, and central banks have taken note of this factor. Innes argues that we are likely to see sovereign gold accumulation to a degree that hadn’t been done before as central banks seek to protect themselves from an increasingly threat-prone fiat system that faces sanctions risks, threats of military conflict, international trade fragmentation, and other such macroeconomic threats.
Innes affirms that gold is growing in its role as the preferred asset when investors are no longer confident that policymakers have the ability to control the results of the systems they create. Political trust is very low, and this is increasing the appeal of gold, Innes says.
As economies regain a degree of normalcy once the tensions in the Middle East are resolved, more central banks are likely to resume their gold accumulation and a lot more investors are likely to add gold to their portfolios as a way to shield those portfolios from the increasingly fragile global economy.
As that happens, Innes is convinced that gold will rally in a major way now that speculators have been forced to exit the market after its recent swings. Entities like Numa Numa Resources Inc. that are currently developing mining properties rich in gold deposits could be poised to benefit from the expected structural bull market for bullion in years to come.
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