Morningstar Institutional Equity Research has published a research report on gold. Below are excerpts of the report. If you are interested in reading the full report please contact equitysupport@morningstar.com.
Executive Summary
Central bank purchases, particularly from the official sector in emerging economies, have been the largest single driver of higher gold prices during the past five years. This development is particularly notable as central banks have historically been net sellers of bullion since the 1980's. We believe central banks from emerging economies have been buying gold to diversify their foreign exchange reserves, while developed Western countries with large legacy bullion holdings now see gold as a strategic reserves asset and have accordingly halted their gold sales programmes. We think gold holds particular appeal for countries with large U.S. dollar holdings such as China and OPEC member nations, given gold's historically negative correlation versus the greenback. However, we do not believe central bank buying can maintain its current pace over the long haul, which supports our lower long-term gold price forecast of $1,200 per ounce.
That being said, we see a number of potential scenarios regarding official sector gold demand over the next several years, some of which contemplate accelerated central bank purchases which could be very bullish for gold prices in the near to intermediate term.
Key Takeaways
- Central bank buying has been the largest single driver of increased gold demand and gold prices during the past five years. The increase in gold demand from central banks switching from selling bullion to purchasing the yellow metal far eclipses the growth in gold demand from the emergence of exchange-traded funds, or ETFs, a commonly referenced culprit for higher bullion prices.
- We have seen central banks in developed economies drastically reduce or even halt their gold sales programmes, while the official sector in emerging economies has accelerated its bullion purchases. Several of these countries engage in "stealth" purchases of gold, which restrict market visibility of their bullion transactions.
- We believe central banks are buying bullion primarily to diversify their reserve assets. We think gold holds particular appeal for countries with large U.S. dollar holdings such as China and major oil exporting nations because of the yellow metal's negative correlation with the dollar.
- While central bank purchases have undoubtedly led bullion prices higher during the pasts everal years, we do not think that it can continue to do so over the long run as gold already comprises a significant percentage of global official sector reserve assets. However, we do see the possibility of a surge in official sector purchases leading to a bullish price environment for the yellow metal over the next several years.
