Emerging market central banks to fuel gold prices much higher

Published January 23rd, 2012 - 01:37 GMT
The central banks have a duty to preserve the value of their assets in real terms and holding depreciating paper currencies is not a prudent way to do it
The central banks have a duty to preserve the value of their assets in real terms and holding depreciating paper currencies is not a prudent way to do it

Central bank buying of gold has grown from net sales to nearly half the market level of jewelry, with the central banks of emerging markets still holding far lower amounts of gold as a percentage of dollar reserves than developed countries at around five percent.

Precious metals consultancy GFMS said in an update to its Gold Survey 2012 that this shift is very significant and that its overall impact on market dynamics should not be overlooked.

Going for gold

Japanese broker Nomura agrees and has calculated the impact of a move by the 18 largest non-US/EU dollar reserve holders to a 10 percent gold allocation. It shows a new demand for gold of 3,400 tonnes compared with forecast total demand of 4,505 tonnes for 2011. Remarkably this study of the impact of emerging market central banks on gold demand does not include China. Nomura sees this as unlikely because of the possible negative impact on US treasuries, quite a heroic assumption! That said the rising price of gold is bound to impact on the demand for jewelry from traditional buyers in India, though this will likely be overwhelmed if emerging market central banks really start to shift in earnest to gold reserves.

ArabianMoney sees this allocation to gold by emerging market central banks as an obvious and highly predictable development in a world of mounting government debts denominated in devaluing currencies.

Prudent bankers

The central banks have a duty to preserve the value of their assets in real terms and holding depreciating paper currencies is not a prudent way to do it. That is why almost no central bank is a net seller of gold at the moment. We think this is going to be an accelerating trend as bond markets get into more and more trouble. Much of the shift will also be hidden. As much as 80 percent of global gold trading is private and away from the official markets.

That means the biggest price rises for gold will come after the purchases are made and not before. Indeed, they are probably already baked in the cake.


Copyright 2019 Peter John Cooper All rights reserved

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