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Central Banks Buying More Equities than Gold? Why?

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QUESTION: Marty; It seems when Goldman Sachs makes a recommendation, it tends to be the kiss of death. They came out and said the stock market was going to crash at the end of 2017 just before it broke out. Now they are pitching gold but they have been the ones who controlled the warehouses. They are claiming the central banks are the buyers so that is an indication of a bull market. Any comments on Goldman’s analysis?


Forecasting Crystal Ball

ANSWER: Yes, it often seems to be the old trick that was played by the Salomon Brothers. Their analysts would be quoted widely touting to buy some bond and they were inevitably the sellers. Goldman said cash was king in November 2018, not stocks. Five of the top investors in 2018 all said the stock market would crash as reported in Money Magazine. Goldman was bearish if Trump won, as reported by the New York Times on October 31, 2016. Even Goldman Sachs told everyone to sell in 2019. This is the problem when you put out forecasts based upon fundamentals. They are just sophistry, for you can spin them any way you like. How many times have we heard a stock declines on positive news and the excuse is that the street was looking for better numbers.

Goldman Sachs’ new claim saying “gold’s strategic case still strong” pointing to central bank buying is highly questionable. It is a statement that seems to be a half-truth. Because the euro is paying a negative interest rate, the only way for central banks to diversify has been to buy gold and equities. Otherwise, all they have are dollars. There are people on the board at the European Central Bank proposing that they too begin to buy equities in Europe.

The amount of gold added to central bank portfolios was tiny in comparison to equities. They bought more than $1 trillion of equities in 2018. The central banks bought only about $57 billion of gold in the past 3 years. This story is very misleading. It makes it sound like gold is being bought because the banks know the dollar will crash. The truth is so far from the implications.

If you are going to pretend to make a forecast based upon fundamentals, then tell the FULL story and do not leave out the other parts.