Kitco News – Central banks are not only purchasing more gold than in recent years, but a number of new buyers have entered the fray.
This includes Poland and Hungary, the first European Union nations to buy gold since the start of the century, said Junlu Liang, senior analyst with the consultancy Metals Focus. In the case of Hungary, the central bank not only bought its first gold in 32 years, but also increased total holdings by 10-fold.
“Central-bank buying has accelerated sharply,” said Natalie Dempster, managing director for central banks and public policy with the World Gold Council. “It has also become geographically more diverse, with several new countries adding gold for the first time in decades.”
In fact, she added, 16 different central banks have increased their gold reserves since the start of 2017. In its quarterly report on demand trends released this week, the World Gold Council reported that central banks collectively made net purchases of 148.4 tonnes in the third quarter, the most since 2015.
Metals Focus is looking for global central-bank net gold purchases of up to 450 tonnes this year, which would top 390 and 375 the last two years, Liang said. If so, this would reverse a four-year gradual decline in net bullion buying since 2014, with last year’s total down by 42% from the multi-decade high of 646 tonnes in 2013, the consultancy said.
Different organizations compile the data slightly differently. For instance, some use figures as they are released monthly by the International Monetary Fund. This tends to have a two-month lag, thus does not include some of the recent purchases, such as those from Hungary. Other firms add up the figures even when they are announced ahead of the IMF data.
From the start of the year through the end of August, central banks added 260 tonnes, said Dempster, who compiles data for the World Gold Council. This excludes the data from Hungary. Still, this is a 50% increase from the same period last year.
CPM Group’s data shows 11.4 million ounces of net purchases have already occurred, thereby already exceeding the 10.9 million from all of last year, said Rohit Savant, director of research.
Bloomberg reported that central banks now collectively hold more than 33,000 tonnes of the metal. The news organization said this is roughly one-fifth of all the gold ever mined.
Who Are The Central-Bank Buyers?
From 2016 to the first half of 2018, most purchases were by a handful of central banks, including Russia, Kazakhstan and Turkey, Liang reported. The People’s Bank of China, meanwhile, has been conspicuous by its absence since 2016.
“What has been interesting over the summer is we have seen new countries start to buy gold,” Liang continued.
Poland became the first, adding nearly 14 tonnes in the third quarter, Liang said. Then came the news that Hungary increased its gold reserves by 10 times. The Hungarian central bank announced this increase this month, and the data has not yet shown up in the monthly statistics from the IMF.
The central bank issued a statement saying that it hiked its gold reserves from 3.1 tonnes to 31.5 tonnes, all in October, its first purchases since 1986. Further, metal was transferred to Hungary. The ratio of gold in its reserves jumped from less than 1% to 4.4%, which the bank said is the average of non-euro area Central and Eastern European countries.
“Holding precious metal within the country is consistent with international trends, enhances financial stability and may strengthen market confidence in the Hungarian economy,” the bank said in its statement. “Preserving its historical role, gold continues to be one of the safest assets in the world, which enhances stability and confidence even under normal market circumstances.”
Meanwhile, India also has been slowly increasing its reserves, adding 21.8 tonnes so far this year, with more than half in the third quarter, Liang said. This was the country’s first major increase since purchasing 200 tonnes off market from the International Monetary Fund in 2009.
“Part of this increase was related to the gold monetization program. But part could also be a reflection of portfolio diversification,” Liang explained.
Meanwhile, Bloomberg has reported that Mongolia bought 12 tonnes this year, although Liang added that the country itself has not confirmed this.
Meanwhile, Liang said, Russia has continued to buy gold along the lines of 50 to 60 tonnes per quarter, with 159.8 tonnes for the year to date. The country has slightly bought above 200 tonnes annually over the last three years, she said. Kazakhstan has been buying 30 to 40 tonnes a year, and the consultancy expects this to continue, with the central bank already purchasing 34.1 tonnes.
Turkey has bought 54.7 tonnes so far in 2018, including 18 in the third quarter, Liang added.
“Their currency is obviously in trouble. They have been having a lot of economic problems,” Savant said.
Why Has Central-Bank Gold Buying Picked Up?
Analysts list a number of reasons why central banks have been buying gold, from geopolitical concerns to diversification of reserves.
Further, many of these purchases occurred at a time when gold prices were relatively low, especially compared to early this decade when they briefly topped $1,900 an ounce, Savant explained. Spot gold dropped to a three-month low of $1,160.75 in mid-August after trading as high as $1,364 in mid-April.
Further, Savant continued, many central banks have much of their reserves in the U.S. dollar, but the greenback may not remain as strong as it has been. When the dollar falls, gold tends to rise, and vice-versa. “They just keep looking for ways to diversify,” Savant said.
In the case of Russia, officials simply want to move away from the U.S. dollar, Dempster explained.
“Russia has bought a huge amount of gold over the past decade,” she said, adding that this now stands around 2,000 tonnes, a 10-fold fold increase over the past decade. “At the same time, Russia has recently sold the majority of its holdings of U.S. Treasuries, and the Bank of Russia said it will continue the policy of de-dollarization.
“In other countries, it’s probably re-balancing related, driven by a combination of rising foreign-exchange reserves and a lower gold price, meaning the share of gold in total reserves has fallen and they are re-balancing back to their preferred strategic level. A lot of central banks do manage their gold portfolios in this way.”
The desire for diversification may also be driven by a deteriorating view of other reserve assets, Dempster continued. Gold mainly competes with bonds from advanced-economy countries in a reserve portfolio, but budget woes in the U.S. and Europe and “Brexit” in the U.K. have increased the long-term risks associated with these currencies.
“It is also worth noting that the new buying has been concentrated in countries that have especially low allocations to gold,” she added.
A shift in other currency allocations also may be driving some of the demand. Some nations are now holding China’s currency in their reserves, reflective of growing trade links with China. Allocations into the Chinese currency can be expected to grow over time, giving rise to a shift to a more multi-currency system rather than one principally in the U.S. dollar, Dempster said.
“But any such shift could be de-stabilizing, and some central banks might be buying gold as a hedge in anticipation,” she added.
Purchases Expected To Continue
Liang looks for the usual buyers — Russia, Kazakhstan and Turkey – to continue purchasing gold.
“Hungary is more likely to be a one-off [buyer] given that they have already increased their holdings by 10-fold,” she said. “It will be interesting to see whether Poland will continue, giving that they have been made steady purchases over the last three months.”
Dempster sees central banks collectively remaining net buyers.
“I think we may be seeing the beginning of a structural change here and we could see significantly higher purchases from central banks going forward, coupled with a further broadening in demand,” she said.