Central Banks Buying More Gold

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital

Managing Director, American Precious Metals Advisors

Central banks collectively have taken a much more positive view of gold in recent years. Increasingly, many investors – both retail and institutional – are looking at these official-sector gold purchases and concluding they, too, should be diversifying their savings and investments with some physical gold.

Just this week, it has come to light that Mexico’s central bank, the Banco de Mexico, purchased some 93.3 tons this past February and March. That’s about 3.5 percent of annual world gold-mine output worth more than $4 billion at recently prevailing prices.

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 in each of the past two years, even allowing for the IMF’s 403 ton gold sales program, which ended some months ago.

Officially published data on central-bank gold transactions are not to believed as some countries buy gold surreptitiously, choosing not to report purchases . . . and data on sovereign wealth fund gold investments are, for the most part, unreported. So, it's not possible to get an exact reckoning of net annual purchases or sales by the official sector.

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, myself included, 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, in fact – to its official holdings over the past few years – but did not report these purchases until last June. It is likely that the Saudi Arabia Monetary Authority also continues to buy . . . along with some of the other oil producers with dollar-heavy, gold-underweighted official reserves.

The People’s Bank of China, the PBOC, and other central banks have an incentive to buy gold discretely and surreptitiously – simply because the announcement and acknowledgment of their buying programs would likely affect the yellow metal’s price and raise these central bank’s acquisition costs.

What we do know is that the list of countries that have bought gold since the beginning of 2009 continues to grow. China, Russia, India, Saudi Arabia, and now Mexico have been the biggest buyers. Other gold-buying countries include Kazakhstan, Sri Lanka, Mauritius, Venezuela, Bolivia, the Philippines, Thailand, and even Bangladesh.

Meanwhile, in recent days, it has been suggested by senior German officials that Portugal ought to sell some of its official gold holdings to ease its difficult debt problems. Should such a sale take place it is likely that a number of other central banks would quickly line up as potential buyers, with Germany’s Bundesbank and the European Central Bank at the front of the line.

Recent year gold sales by the IMF have demonstrated that large-scale official sales need not disrupt the market – and that central banks underweighted in gold are willing buyers when given the opportunity to make off-market purchases.