Central banks huge gold buyers in 2011

Gold had a solid day yesterday, closing the Comex pit session above important resistance at $1,650 per ounce. Silver for March delivery also finished above $30 per ounce. At the currency markets the US dollar weakened slightly, with the Dollar Index losing 0.36% to close at 81.18. This helped solidify recent gains in crude oil prices, with WTI crude now back above $101 a barrel.

With negotiations still on-going between the Greek government and its private creditors and the situation in Hungary looking increasingly fraught, the World Bank has warned that developing nations should prepare for a slump in economic activity comparable to the 2008/09 downturn. Though the Bank’s chief economist Justin Lin stated that Europe’s sovereign debt crisis was “contained”, he stated that “the risk of a global freezing-up of the markets and as well as a global crisis similar to what happened in September 2008 are real.” The ratings agency Fitch has now stated that it expects a default from Greece in March.

Meanwhile, the precious metals consultancy group GFMS reported yesterday that net central bank purchases of gold reached 430 tonnes last year – a more than five-fold increase on the previous year and the highest level since 1964. As reported by Dow Jones Newswires, in 2010, net demand from these institutions stood at just 77 tonnes. GFMS expects central bank buying to remain at an elevated level, with demand of around 190 tonnes in the first half of 2012 – a slight reduction on the 205 tonnes bought in the first half of last year.

GFMS notes “notably higher enthusiasm” from emerging market central banks for gold. Mexico was the largest official purchaser last year – buying 100 tonnes of the yellow stuff. Other notable official buyers include Turkey, Russia, South Korea, and Thailand. China is also acquiring gold at a rapid pace (around 350 tonnes a year), but its acquisitions are from mines in China rather than from open market purchases.

Cynics might argue that, given central banks’ generally-poor track records when it comes to economic forecasts and timing gold sales and purchases, that this burst of enthusiasm from these institutions might stand as a decent contrarian indicator that the best days of this latest gold bull market are behind us. This ignores the fact that – with the exception of South Korea – central banks in the developed world remain entirely absent from the buyers’ club. It was primarily developed-world central banks in countries such as Switzerland, Australia, Canada, the UK, France and Spain who were responsible for the bulk of official gold selling in the 1990s at prices below $400 per ounce.

The topic of central bank gold buying and selling deserves far greater examination in another article; as a parting note, another way of looking at this question is to ask: what could prompt central banks to sell gold? What alternative, high-liquidity asset could they own that would be a better long-term store of value than gold? US dollars? Euros?

GoldMoney: Buy gold & silver online

Author: The GoldMoney News Desk

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing