Dedollarization and Uncertainty drive Central Bank Demand for Gold
- Central banks added 81.7t to their gold reserves in the
third quarter
- Total central banks purchases in the year-to-date reach
271.1t.
- Fellow-SCO member Kazakhstan and Belarus also had to
holdings
- 90% of reserve managers intend to increase or maintain
gold reserves.
- “The case for gold remains compelling for reserve
managers” state WGC
- Unconventional monetary policies will underpin gold
demand in coming years.
Central banks added 81.7t to their gold reserves in the third quarter,
bringing total purchases in the year-to-date to 271.1t. This was a fall from
168t purchased in the previous quarter. Much of this has gone unnoticed by
the mainstream media, something which seems shortsighted given the monetary
and geopolitical implications both this and recent elections results may lead
to.
The World Gold Council described recent buying as a ‘more measured’
approach to previous years. Between Q3 2014 and Q3 2015 407.7t were purchased
by central banks. The data was slightly skewed last year as China contributed
their gold reserve data for the first time since 2009.
Gold buying will not stop
The World Gold Council and other mainstream analysts do not appear unduly
worried about the fall in gold demand from central banks. The current
geopolitical and economic environment provides an irrefutable argument for
central banks, as well as investors, to hold gold.
“The case for gold remains compelling for reserve managers amid the
prevalence of negative interest rate policies and diversification away from
the US dollar” WGC, Q3 report.
Commenting in the aftermath of the US election Juan Carlos Artigas,
director of the WGC’s investment research, drew attention to the politics of
anger and argument that are playing out across the world stage, signalled by
both Brexit and the US election result.
“This trend, combined with uncertainty over the aftermath of years of
unconventional monetary policies measures, will firmly underpin investment
demand for gold in the coming years,”
This was reflected in a recent WGC survey of 19 central bank reserve
managers which found nearly 90%have plans to either increase or maintain
their gold reserves at current level.
In a research note from Simona Gambarini of Capital Economics, he argues
that “the case for gold as a reserve asset remains strong”, given around one
third of global government debt now has negative yields:
In particular, we continue to expect central banks from developing
economies to be the main source of demand from the official sector in the
future, as they typically have much lower gold holdings as a percentage of
total reserves compared to those in advanced economies.
However, for some whilst there is an air of uncertainty following
political events of 2016 and a tricky economic environment, this is not
enough for central banks to add more gold to their reserves. In a recent note
Nell Agate, a Citi analyst, stated ”While negative real interest rates
and low sovereign bond yields across several key currencies and countries may
encourage inflows into gold, particularly as there are limited alternatives
for safe-haven / reserve assets, we expect to see reserve holdings maintain
current trends.”
Russian love for gold
Those central banks who we have become used to seeing purchase gold on an
ongoing basis continued to do so – Russia (43.9t), China (15.2t) and
Kazakhstan (10t). Belarus also added over 3t to their reserves.
The Central Bank of Russia has outpaced the PBOC by nearly 150t in the
last seven years, and has been the world’s largest central banks buyer of
gold reserves for some time. This trend is expected to continue. Earlier this
year it indicated that over the next 3-5 years it will look to expand its
holdings to some half a trillion dollars.
This push for more gold is now driving the Russian supply chain. In May
2015 Russian Central BankGovernor Elvira Nabiullina stated that she saw no
need for the Russian government to buy up all domestic gold production (as is
done in China) as the central bank’s gold demand could be satisfied on the
open, international market. However, F. William Engdhal reports that so
central is gold to the monetary policy that the Central Bank is now buying
from domestic mining stocks to satisfy their demand. This is particularly
notable given Russia is the world’s second largest gold producing nation.
‘Dedollarization’ drives the SOC’s love for gold
When looking at the top gold buyers, one must remember that Russia and
China are the key members in the Shanghai Cooperation Organization (SCO). The
project includes former Soviet Union states as well as India and Pakistan.
The aim of the 16 year old organisation is to unite those nations in the
face of increasing American expansionism. The group has discussed trade, a
new currency and a unified energy system. The currency is what has many
people nervous.
At a time when Russia is often declared a failed state by the US, the fact
is that their economy is, in some ways, in far better shape. Namely their
very low debt-to-GDP ratio and movement towards a ‘good as gold’ currency.
As of October the Central Bank of Russia held $88.2 billion in Treasurys,
a significant change from the $131.8 billion held in 2014. This move has been
labelled as dedollarization, and it is thought that this process is funding
gold purchases as the country moves to prop up its reserves as the Russia
ruble has suffered hugely since the collapse in crude oil. Not to mention
lines to cheap credit were cut thanks to US and European sanctions and
inflation is well into double figures.
“Notably, the Russian central bank has been selling its holdings
of US Treasury debt to buy the gold, de facto de-dollarizing, a
sensible move as the dollar is waging de facto currency war
against the ruble,” writes F.
William Engdahl.
That Russia feature so prominently in gold buying statistics is of no
surprise. As Goldcore
reported last year, Russia has made no secret of its desire to hold
gold, and to increase their reserves. Monetary policy manager Dmitry
Tulin stated, “The price of it swings, but on the other hand it is a 100
percent guarantee from legal and political risks.”
Take control of uncertainty with gold
Yesterday we saw the price of gold surge 5% on the back of Trump’s
‘surprise’ victory in the US elections.
Much of this was driven by the uncertainty that an inexperienced President
would bring. This morning the markets have largely recovered from the shock,
however macroeconomic, systemic, geopolitical and monetary risks remain
heightened. This is something that the Russians, along with China and their
allies are all too aware of.
Their moves to diversify into gold and to keep the safe haven central to their
monetary policy is something that should be a lesson to investors. The idea
that gold offers a ‘100% guarantee’ is alluring in a world that is being
influenced by a politics of anger and economy of instability and uncertainty.
Gold Prices (LBMA AM)
10 Nov: USD 1,280.90, GBP 1,034.07 & EUR 1,175.48 per ounce
09 Nov: USD 1,304.55, GBP 1,050.42 & EUR 1,176.84 per ounce
08 Nov: USD 1,284.00, GBP 1,034.26 & EUR 1,162.02 per ounce
07 Nov: USD 1,286.80, GBP 1,036.13 & EUR 1,162.50 per ounce
04 Nov: USD 1,301.70, GBP 1,042.79 & EUR 1,172.57 per ounce
03 Nov: USD 1,293.00, GBP 1,040.61 & EUR 1,165.90 per ounce
02 Nov: USD 1,295.85, GBP 1,056.51 & EUR 1,169.76 per ounce
Silver Prices (LBMA)
10 Nov: USD 18.75, GBP 15.11 & EUR 17.20 per ounce
09 Nov: USD 18.81, GBP 15.12 & EUR 16.96 per ounce
08 Nov: USD 18.26, GBP 14.72 & EUR 16.54 per ounce
07 Nov: USD 18.22, GBP 14.67 & EUR 16.47 per ounce
04 Nov: USD 18.30, GBP 14.65 & EUR 16.48 per ounce
03 Nov: USD 18.07, GBP 14.50 & EUR 16.32 per ounce
02 Nov: USD 18.54, GBP 15.05 & EUR 16.70 per ounce
