Are Central Banks Hoarding Gold? What Does That Say about Gold?



Central banks and their race to hoard gold

Central banks have been net buyers of gold since the beginning of the financial crisis of 2008. According to data from IMF (International Monetary Fund), central bankers around the world have purchased 590 million metric tons of gold, which accounts for ~14% of the annual gold demand.

China, Russia, and Kazakhstan have emerged as the three most prominent countries buying gold. Central banks of these countries and others are using gold to diversify from currencies.

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Venezuela falls back on gold

Hoarding by central bankers reaffirms gold’s appeal as a safe-haven asset. Let’s look at Venezuela as a case in point. Venezuela sold $1.9 billion worth of precious metals in the first quarter of 2016, mainly to repay debts. It was left with the lowest gold reserves on record for the country. As an OPEC (Organization of the Petroleum Exporting Countries) member, it also suffered under increasing pressure of falling crude oil prices (USO) (UCO).

Russia and China hoarding unabated

Meanwhile, Russia (RSX) and China (FXI) are continuing to purchase gold month after month. Russia has been the largest gold purchaser in the last four years. Its deteriorating economic condition due to falling crude oil prices and the implementation of Western sanctions were the main reasons Russia has taken shelter in gold, away from the US dollar.

After reporting its gold holdings following a gap of six years in June 2015, China has been purchasing gold every month except May 2016. China’s gold holdings reached 1,808 tons at the end of April 2016, compared to 1,658 tons at the end of June 2015.

What’s even more interesting is that gold reserves as a percentage of total reserves for these countries are still miniscule compared to developed countries such as the United States, France, and Italy. While China holds only 1.8% of its reserves in gold, the United States holds 72%. This could lead to an upside in gold purchases for these countries and new demand from other countries as economic and political outlooks remain uncertain.

This, in turn, could be positive for the medium-to-long-term outlook for gold prices (GLD) (IAU) and gold miners (GDXJ) such as New Gold (NGD), Barrick Gold (ABX), and Royal Gold (RGLD).


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