Are Central Banks Still In Love With Gold?

Published February 14, 2013

| Wall St. Cheat Sheet

The recent price action of gold may lead some to believe the precious metal has fallen out of favor with the market, but central banks across the globe continue to love the safe-haven metal.

While some central banks print money in historic amounts, others are buying gold. According to the World Gold Council’s latest report, central banks purchased 145 tonnes of gold in the fourth quarter of 2012, the highest quarterly haul since the sector became net buyers in 2009. For the entire year, central bank buying surged 17 percent to 534.6 tonnes, the highest annual total since 1964. In comparison, central banks bought 456.8 tonnes in 2011.

Nations like Russia and China continue to find gold attractive. According to the WGC, Russia added approximately 75 tonnes to its reserve holdings last year by purchasing domestically produced gold. This echoes recently released IMF data that shows Russia added 570.1 metric tons of gold to its stash over the past decade, more than any other nation in the world. According to data from the Census and Statistics Department of the Hong Kong government, gold imports into mainland China from Hong Kong nearly doubled to an all-time high last year. China, the world’s second-largest economy and gold consumer, imported a record 834,502 kilograms (834.5 metric tons), including scrap and coins, in 2012.

Diversifying with gold…

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Due to diversifying needs, gold is an easy answer for developing markets. The WGC explains, “The list of countries actively adding to their official gold holdings remains heavily concentrated in developing markets, which partly reflects the scale of growth in the reserves of these markets over recent years. As the official reserves of these countries swell, with their heavy emphasis on U.S. dollars- and euro-denominated assets, the need for diversification also increases. With a focus on high quality, liquid assets as desirable alternatives, gold is a natural destination for a proportion of these increased reserves. A number of research papers have addressed the issue of gold’s characteristics and benefits as a reserve asset, as well as optimal allocations for gold within a standard reserve asset portfolio.”

Since becoming net buyers in 2009, central banks have added almost 1,100 tonnes to global gold reserves, a sharp contrast to the 1,143 tonnes of net sales seen in the preceding three years. In fact, very few central banks are selling gold. The WGC reports  that under the Central Bank Gold Agreement, which caps gold sales, only 5.5 tonnes were sold throughout last year. This amount was fully accounted for by Germany and its need to mint commemorative gold coins.

Overall, gold demand in the fourth quarter reached 1,195.9 tonnes, the highest fourth quarter haul on record. Annual demand in value terms reached its highest amount in history at $236.4 billion.

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Disclosure: Long EXK, AG, HL, PHYS

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