Central bank interest in gold is on the rise as countries over-weighted in U.S. dollar reserves and underweighted in gold seek to diversify their official reserves. Most prominently, the central banks of China, Russia, India and some of the oil-exporting nations have led the way, setting an example for other central banks — as well as some private investors — to follow.
Generally, central banks are conservative and cautious buyers, striving to acquire gold without disrupting the market or adding to price volatility. As a result, in May as prices retreated below $1,500 an ounce, central bank bargain hunting underpinned the price at lower levels and contributed to the subsequent recovery.
Unfortunately, published data on central bank gold transactions present an incomplete picture as some countries buy gold surreptitiously, choosing not to report purchases.
Though much central bank and sovereign wealth fund buying remains off the books and unreported, I have no doubt that large-scale official purchases have been important in recent years and will continue to support rising gold prices in the months and years ahead.
After net sales of roughly 400 to 500 tons a year over the prior decade, the official sector (including central banks, the International Monetary Fund and sovereign wealth funds) became a net buyer of gold in 2009.
Last year, net official purchases continued as a number of central banks, principally in Asia, added to their official reserves while sales by European central banks were minimal — and have now virtually ceased except for some small reductions for domestic gold coin programs.
Net official purchases may have totaled as much as 100 to 200 tons — and possibly more — in each of the past two years, even allowing for the International Monetary Funds’s 403-ton gold sales program that ended months ago.
China, for example, announced just about two years ago that its central bank had purchased 454 tons in the prior six years — but chose not to report these purchases until April 2009. Some observers believe that China continues to buy significant quantities on a regular basis, possibly 100 tons or more annually, some if not all from domestic mine production.
Saudi Arabia also added significant quantities of gold — 180 tons — to its official holdings over the past few years, but did not report these purchases until last June.
Most recently, we learned that Mexico’s central bank, the Banco de Mexico, purchased some 93.3 tons in February and March.
Meanwhile, in recent weeks, senior German officials suggested that Portugal ought to sell some of its official gold holdings to ease its difficult debt problems. Should sales by Portugal or other overly indebted eurozone nations ever take place, it is likely that a number of other central banks would quickly line up as potential buyers, with Germany’s Bundesbank, the European Central Bank and the People’s Bank of China, among others, at the front of the line.
The recent IMF gold sales program demonstrated that large-scale official sales need not disrupt the market and that central banks underweighted in gold are buyers when given the opportunity to make off-market purchases.
Central banks collectively have taken a much more positive view of gold in recent years. In turn, many private investors — both retail and institutional — are looking at official-sector gold purchases and concluding they, too, should be diversifying their savings and investments with some physical gold.
Jeffrey Nichols is a recognized expert on the economics of precious metals markets. He is managing director of American Precious Metals Advisors (www.NicholsOnGold.com) and also serves as senior economic advisor to Rosland Capital LLC (www.RoslandCapital.com), a retail dealer of precious metals investments and numismatic coins. Follow Jeff Nichols on Twitter @ NicholsOnGold.