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The Bullion Report

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January 19, 2011 in 'The Bullion Report'

Gold ReservesGold Reserves

Central banks have long held gold as part of their reserves, and I have explored this topic before. This stock of bullion is an interesting component of the demand side for precious metals. The Bank of Tunisia’s gold reserves were recently pilfered by the first lady, bringing central bank gold to the headlines again. The news focus is on the Tunisian President’s wife and her 1.5 tons of gold bars, but there are legitimate movements in and out of central bank reserves that are worth revisiting.

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Past performance is not indicative of future results.
***chart courtesy Gecko Software

In my last report on central bank gold reserves, I looked at the basic ebb and flow and why it matters to the gold markets. One of the places to look for statistics on gold reserves is the World Gold Council (WGC) website. They compile reports based on the latest information from the International Monetary Fund (IMF). It is important to note that this data is based on the publicly reported holdings of certain countries. Not all countries known to hold gold actually make a public reporting of what they have.

Within recent data on world gold holdings, you can see that overall the gold held by banks declined in the last decade. There was a genuine sloughing of gold reserves, part of which was performed under those infamous gold agreements. The decline appears to have halted in the wake of the credit crisis and the fallout from the global economic tailspin.

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Past performance is not indicative of future results. Data courtesy of World Gold Council.

This contrasts the sentiment that was at the forefront about ten years ago. At that time, there was an apparently popular view that gold would not hold a place in the financial system. Precious metal assets were seen as a financial dead-end, a place where money could get tied up versus other assets which could provide a possible return.

The Australian central bank was among the net sellers of gold reserves at the end of the 20th century. They sold 167 tons of their gold, believing that mining reserves could be used if a need for gold appeared. Economic analysts suggest that this move cost the bank around $5 billion. However, bank advisors suggest that the move was prudent, and that gold is only held as a guard against international financial crises. An article about this sale suggests that for some observers, recent economic crises are being managed without gold. (1)

This hasn’t dampened all central bank demand for gold. Among the countries being closely watched for gold acquisitions, China stands out as it moves slowly up to the front of the pack in overall holdings. Right now, China sits just below the US, Germany, France, and Italy with the fifth largest pile of gold bullion. Much of the 454 ton gain in their holdings was picked up over a span of six years, but only recently announced. This fuels some suspicions that they are still quietly adding gold and silver to their reserves. Since China’s development is often cited as a reason for climbing commodity demand, it is only natural to take a look at their bank’s gold holdings as a possible place for growing bullion appetites. This contrasts the apparent lack of gold additions to US holdings.

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Past performance is not indicative of future results. Data courtesy of World Gold Council.

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Past performance is not indicative of future results. Data courtesy of World Gold Council.

China is not alone in public scrutiny of their central bank’s interest in adding to reserves. Russia and India are among the notable buyers of gold from recent sales under the gold agreement. Russia also happens to be home to a significant source of platinum mining. India is another developing nation that is used as an example of growing demand for various commodities. Their gold holdings have blossomed and were recently valued at over $22 billion. (2)

 

 

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Past performance is not indicative of future results. Data courtesy of World Gold Council.

Summary

The Central Bank Gold Agreements obviously play a large role in the sales of gold. They were originally created to try to remove the chance of destabilization caused by large sales. Since the financial crisis and economic downturn it is actually the buying of gold which appears to be the area to watch. If demand from central banks slipped so much in the preceding few decades, wouldn’t a return to net buying warrant a greater level of interest? People who have been watching countries like China, Japan, Russia, and India scoop up gold definitely think so. If there is a return to adding gold and other precious metals to central bank reserves, it could definitely heighten already historic investment interest.

1. http://www.money-au.com.au/finance-news/banking/australian-central-bank-decision-to-sell-gold-reserves-cost-country-5-billion-7693/
2. http://www.rttnews.com/Content/AllEconomicNews.aspx?Id=1521914&SM=1

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"I don't believe you can return to a fixed exchange rate system and that is the gold standard. I'm not advocating a return to the 19th century when money supply was linked to gold."- Press accounts of a speech made by World Bank President Robert Zoellick, November 2010

 


Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.