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Gold could make more gains in 2019 on central bank buying spree

ASX-listed gold stocks are poised to build on their rally in 2019 as China is on a gold-buying spree!

The spot price of the precious has jumped 10% to US$1,293 an ounce since hitting a more than one-year low back in August last year.

Our gold miners have also outperformed the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index with the Newcrest Mining Limited (ASX: NCM) share price racing up 26%, the Evolution Mining Ltd (ASX: EVN) share price rallying 31% and Resolute Mining Limited (ASX: RSG) share price adding 10% over the past six months.

Jump in China’s gold reserves

The Chinese central bank increased its gold holdings for the fourth straight month and gold bulls believe other central banks will be looking to do the same, according to a report on Bloomberg.

Goldman Sachs is predicting that the price of bullion will run another 12% over the next 12 months and central bank buying is helping to reinforce such upbeat views.

Data from the People’s Bank of China’s website showed it had increased its gold reserves by 11.25 tons in March after adding 42.9 tons in the previous four months.

What’s interesting is that the Chinese central bank is highly selective in releasing its gold holdings and have gone for long periods without updating its figures.

Buying interest isn’t only coming from China

Bloomberg noted that if China continued to buy gold at the same rate for the rest of 2019, it could end the year as the biggest buyer of the yellow metal after Russia, which added 274 tons in 2018.

Governments like China and Russia have an incentive to buy gold. Such countries are trying to weaken the link between the US dollar and their respective currencies – and they aren’t alone in building their gold reserves.

Buying of gold by governments around the world hit 651.5 tons in 2018 – the second highest on record, according to the World Gold Council.

Further tailwind

Gold is getting another boost from the change in tone from the US Federal Reserve, which is now looking more inclined to hold or cut interest rates.

Rising rates are usually bad for the gold price as the precious metal is used to preserve capital during turmoil but generates no yield.

The Fed isn’t the only central bank turning dovish. Our Reserve Bank of Australia is also believed to be under pressure to cut rates here.

Gold miners with Australian operations are among the best placed to enjoy the gold run as their cost-base is denominated in the weakening local currency while gold is sold in US dollars.

I won’t be surprised to see this sector stay on the front foot for the rest of 2019.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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