Friday, February 13, 2015

Central Bank Gold Purchases Surge To Second Highest Level In 50 Years

Central banks around the globe continued to gobble up gold to add to their reserves in 2014 purchasing a total of 477 tonnes, which is a 17% jump from 2013, according to the World Gold Council.
It was the second highest year of central bank purchases in 50 years.
Russia was the stand-out buyer in 2014, as the country added 173 tonnes to its reserves.  Now, Russia holds over 1,200 tonnes of gold and is the sixth largest holder of gold in the world. "They have been buying 10-25 tonnes per month over the last five to six years. The Russian central bank continues to show they are looking to continue that," said Ashish Bhatia, director of central banks and public policy at the World Gold Council.
Other notable buyers of significant size last year included Kazakhstan (48t), Iraq (48t), and Azerbaijan (10t), the World Gold Council said.
Here is a list of the top 10 largest official gold holders as of February 2015:
Source: World Gold Council, International Financial Statistics
The central bank buying in 2014 marked the fifth consecutive year in which central banks were net buyers of gold, which is a significant sea-change from just a decade ago.
"Central banks were net sellers for almost 20 years, but that changed in 2009-2010," said Bhatia.
What is behind the strong appetite for gold among the world's central banks? Bhatia pointed to two main reasons.  
First, "central banks are buying gold because of heightened economic and financial uncertainty. The global economy remains on very fragile ground with growth in Europe, Japan and emerging markets stagnating," Bhatia said. "Yields in major economies are declining. Around the world we are seeing monetary policy continue to ease amid a serious deflation threat."
The second major driving factor behind central bank gold purchases are relative under-allocation to gold by emerging market central banks, said Bhatia.
The United States and Germany —the world's largest official gold holders possess roughly 70% of their reserves in gold.
 "The advanced economies of Europe and the U.S. have large allocations to gold largely because of the legacy of the gold standard. Emerging market economies weren't a part of that era. They are not part of that legacy of the gold standard," Bhatia explained.
Over the past five years, Bhatia noted that China, the Philippines, Mexico, Korea Brazil and Russia have all been adding gold to increase their allocation to gold relative to foreign currencies.  
Bhatia added that Mexico and Korea have both added about 100 tonnes of gold to their reserves over the last five years, a sizable amount.
Through research Bhatia has conducted at the World Gold Council, it has been determined that "optimal allocation" for an emerging market central bank to gold is between 4-10%.
Looking ahead, Bhatia believes that "emerging markets will continue to be strong buyers, with Asian central banks standing out as being under allocated within that group."
"Asian central banks tend to have large foreign currency reserves and relative strong gold reserves," he noted.
In 2015, the World Gold Council expects central banks to be net buyers for the sixth year in a row with more than 400 tones of purchases in gold.

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