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Central Banks Are Accumulating Gold due to Dollar Worries

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Central banks are on a gold-buying spree

Central banks have been net buyers of gold (SGOL) since the beginning of the financial crisis of 2008. Recently, their gold (GLD) buying appetite is only getting bigger. According to Atsuko Whitehouse at BullionVault, “Central banks are buying gold for their reserves at the fastest pace in 6 years.” Macquarie reports that a total of 264 tons have been added to the official-sector gold holdings in the first nine months of the year.

Russia, Turkey, and Kazakhstan are leading the pack

As usual, the central banks of Russia (RSX), Turkey, and Kazakhstan were leading the pack. However, there was an interesting twist in the tale, as some unconventional buyers are also entering the space. Macquarie stated that usually European countries (HEDJ) are sellers of gold rather than buyers. However, Poland joined its counterparts in buying gold in July, when it added 1.9 metric tons of gold (IAU) to its reserves. It again bought 7.5 metric tons of gold in August. Egypt also bought gold for the first time since 1978.

Some of the old players also re-entered the market. According to the World Gold Council (or WGC), the Reserve Bank of India (INDA) bought eight tons of gold in July and seven tons in August after an absence of close to nine years. WGC expects central banks’ demand to “remain buoyant” going forward.

Central bankers move to diversify

Most market participants believe that the move towards gold is due to the central bankers’ intent to diversify away from the US dollar (UUP). Russia’s gold buying activity is certainly a case in point. It has reduced its US government bond (BND) holdings by about 80% this year. More and more countries want to reduce their dependence on the US dollar and back up their debt with gold instead.

Central banks’ continuous increase in gold reserves seems to be a good omen for gold prices. Going forward, countries are expected to keep adding to their gold reserves. What’s interesting is that these two countries’ gold reserves as a proportion of their total reserves are still far below reserves of developed countries such as the United States (SPY), France, and Italy.

In the next part of this series, we’ll discuss the US dollar’s outlook based on “de-dollarization” concerns.

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