Are Central Banks Still Hoarding Gold?

A new report shows global gold demand fell in the second quarter from year earlier levels. Demand in the jewellery, investment and technology sectors all posted a decline, as the average price of the precious metal remained elevated, but range-bound. While some investors were discouraged by the price action, central banks were more attracted to gold than ever before.

Second quarter gold demand totaled 990 tonnes, worth an estimated $51.2 billion, according to the World Gold Council’s latest report. This represents a 7 percent decline from the same period last year, and 10 percent from the first quarter. Jewellery demand fell to 418.3 tonnes, while second quarter investment demand, which includes total bar and coin demand plus ETFs and similar products, weakened 23 percent to 302 tonnes. Gold used for technology purposes also dipped 5 percent to 112.2 tonnes worth $5.8 billion.

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Gold prices spent a great deal of the second quarter in a tight $100 range around $1,600 an ounce, which may have dampened investor enthusiasm. The WGC explains, “The lack of a clear price trend generated a mixed response among gold consumers, particularly in the investment arena. While some investors used this pause in the price to add to their investments, others chose to liquidate and realise profits on their holdings until a stronger price trend re-emerged. These two opposing actions were noticeable across all sectors of investment.” Even with the weakness, investment demand in the second quarter remained within the higher range that started in the second half of 2008. Furthermore, declines were offset by central banks around the world hoarding the precious metal, as it is often used for capital and preservation purposes.

It was a record breaking quarter for central bank buying, with demand surging to 157.5 tonnes in the April through June period. This was the highest demand seen by central banks since the sector became net buyers of the safe-haven asset in 2009. It was a 63 percent increase from the first quarter and double the amount of tonnes purchased in the same period a year earlier. As the sustainability of fiat currencies remain in doubt, nations such as Russia and South Korea continue to add gold to reserves. Russia added another 22.3 tonnes during the second quarter, bringing its total gold position to about 920 tonnes. Meanwhile, South Korea recently announced it had purchased another 16 tonnes of the precious metal in July.

Through the first six months of 2012, the world demanded 2,090.8 tonnes of gold, which was 14 percent above the five year first-half average of 1,828.7 tonnes. Although the price action in gold can be frustrating at times and cause dips in quarterly demand, the bull market is still intact as demand continues to increase with the growing need to protect capital with non-printable assets.

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Disclosure: Long EXK, AG, HL, PHYS