How central banks will push up the gold price
Bank Markazi
A new research note by anlyst Simona Gambarini of Capital Economics suggests official sector buying can take much of the credit for establishing something of a price floor for the metal this year.
During the first quarter this year, the World Gold Council estimates that 120 tonnes of gold were added to global central bank reserves.
Central banks have upped their share of overall gold demand from around 2% in 2010 to as much as 14% last year and in 2013.
Gambarini expects this trend to strengthen adding that “any emerging market central bank looking to reduce exposure to the dollar still has few credible alternatives to gold”:
Most developing countries still hold less than 10% of their reserves in gold, compared to 70% or more in advanced economies. Admittedly, the much higher share in the latter is mainly a legacy of the Gold Standard. Nonetheless, an optimal share that makes the most of gold’s diversification benefits would probably be at least 15%. Even the European Central Bank (ECB), established long after the demise of the Gold Standard, holds around 25% of its reserves in gold.
Barron’s quotes chief economist Warren Hogan and commodity strategist Victor Thianpiriya of ANZ, an Antipodean bank, on the same issue:
“If all central banks in the world were to hold at least 5% of their foreign exchange reserves as gold, this would require the purchase of almost 8,000 tonnes of gold,” argued Hogan and Thianpiriya. Emerging market central banks should remain net buyers of gold to bring their allocations more in line with developed countries’ – to the tune of about 75 tonnes a year, they added.
Source: Capital Economics
While Russia’s central bank has been most active recently (30 tonnes in March and another 8.3 tonnes in April), rumours about massive buying from People’s Bank of China are perennial.
China’s gold reserves are officially put at 1,054 tonnes – a number authorities haven’t updated since 2009.
Gold makes up only around 1% of the country’s $3.8 trillion in reserves compared to more than 70% for the United States which holds more than 8,000 tonnes of gold in vaults.
ANZ expects the gold price to top $2,000 an ounce by the end of the decade while Capital Economics has a $1,400 forecast for the end of this year.
Picture of Bank Markazi, Iran’s central bank, by Ensie & Matthias
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3 Comments
Bill_Wall
There is going to have to be some serious buying from somewhere to change the price dynamics. Overall world demand is down Q1/15 over Q1/14 while supply is up. Supply declines always seem to be in the future as miners figure out ways to keep production up and squeeze more out of old mines. Decommissioning of mines is getting more expensive all the time so that figures in significantly to the economics of continuing to mine declining grades or shut down. The high $US and low oil costs make mining in non-US countries more profitable.
Either demand makes a significant increase or the price declines for an extended period to force marginal mines to close. That looks to be the near term future forward from today’s supply problem.
Rod B
A friend just sent to me a graph and discussion concerning how the central banks worldwide have, since 2000 to 2015.5 have sold into the gold price rise (from 2000 to 2009) and bought gold during the “topping action” (from 2010 to 2015.5). The attached article he sent to me (http://www.marketoracle.co.uk/Article51003.html) says that Elliot wave theory dictates that the “dumb” (my words) central banks sell gold at the wrong time… So, I did some analysis of the graph he sent to me and determined that the same data shows that approximately $1.977 T i gold was sold by central banks in the ten years 2000 to 2009 (ten years) and $2.938 T was bought in the period 2010 to 2015.5. When you normalize these data to a per year average, one can see that the central banks sold gold into the appreciation period and have bought gold during the depreciation era such that the banks have made a profit of $1.175 T in average 2008 dollars. Contrary to the article tenet that central banks have squandered the bank’s funds according to Elliot wave theory, I wish I had 0.001% of that transition largess in my bank account. Central banks, according to the theory, have not done so well… but my calculations indicate otherwise.
Rod B
Ooops… please correct $1.977 T to $19.77 and the $2.938 T to $11.75 T(annualized) over ten years… I did not have my commas in the right places… RB