Central Bank Buying 2009-2014: Then And Now
Central Bank Buying 2009-2014: Then And Now
By Kira Brecht Kitco News
Thursday October 16, 2014 11:15 AM
(Kitco News) - Looking back over the past five years, one of the key themes that has dominated global central bank's behavior towards gold is the firm shift from selling gold to buying the yellow metal.
Prior to the 2008-2009 global financial crisis, central banks were, by and large, net sellers for nearly two decades. That flip-flopped in 2010 as central banks became net buyers. Generally speaking global central banks had been selling about 400-500 tons per year, now central banks are adding about 400-500 tons per year to their reserves.
Now, in 2014, central backs are still buying and expected to be net buyers for the fifth straight year in a row. Global central banks added 242 tons of gold to their reserves in the first half of 2014 and are estimated to add purchases throughout the remainder of the year totaling as much as 500 tones, the World Gold Council estimates.
Historically, 2009 stands out as a key moment on the gold history books as that was the year the Chinese central bank announced the addition of gold to its monetary reserves. "In the second quarter of 2009, Chinese officials reported to the IMF an increase in its gold holdings from 599.98 tons to 1054.09 tones. There has been no update to their gold holdings since then," a spokesman for the World Gold Council said. The Chinese action was the largest central bank purchase recorded in 2009.
Jeffrey Christian, managing partner at CPM Group, shed some light on the significance of the Chinese gold purchase. From 2003-2009, the People's Bank of China PBOC was buying gold and putting it in a special account, with the intention of funneling that gold into the China Investment Corporation (CIC), a sovereign wealth fund, Christian explained. "The PBOC didn't see gold as a monetary asset, but the government was saying we see gold as an investment," he said.
As the 2008 financial crisis roiled global markets and the global economy, the U.S. government and U.S. Treasury attempted to respond to the crisis. However, "in the first quarter 2009, the Chinese government told the PBOC to add that gold to your reserves. It was an overtly political decision to send a message to the U.S. and European authorities that there are other alternatives to the dollar and to show disappointment in how the authorities were handling the crisis," Christian said.
Another significant event in 2009 was the limited gold sales program implemented by the International Monetary Fund (IMF) from September 2009-December 2010. This occurred in the wake of the 2007 Crockett Report, which recommended that the IMF create a new income model. Overall, the IMF sold 403.3 tons of gold. The Reserve Bank of India was a large buyer of 200 tones. "India had 350 tones prior to that purchase. They were the 17th largest gold holder and they moved to the 11th largest gold holder," said Ashish Bhatia, director central banks and public policy at the World Gold Council. Today, the Reserve Bank of India holds 557.75 tons of gold, as of the end of the second quarter 2014, according to WGC.
What other notable shifts have there been in central bank purchases from 2009 to today? See Figure 1 below, a table compiled by the World Gold Council.
Source: World Gold Council
Notably, Russia jumped from tenth place in 2009 to sixth place in 2014. CPM Group's Christian addresses the key themes. "Since 2010, central banks have been consistent net buyers of gold. About 40% of that gold has been bought by Russia and if you add in the other former Soviet Republics that totals 54%," he said.
World Gold Council's Bhatia agreed. "Russia has added 545 tones over the last five years. They are one of the most regular buyers of gold, buying almost every month. They've virtually doubled their reserves in the past five years," he said.
In general, emerging market central banks have also had a strong appetite for gold in recent years. "They don't have the legacy of the gold standard, so they are looking to add to their gold reserves," explained World Gold Council's Bhatia. "Big buyers over the last decade? China has added, India, Thailand, Mexico, Kazakhstan," he said.
Emerging market central banks, in general have much lower ratios of gold reserves than advanced industrialized nations. For example, the U.S. has 72.1% of its reserves allocated to gold, and Germany has 67.8% of its reserve assets in gold, which is primarily a legacy of the gold standard. Data is through October 2014, according to the World Gold Council. For more details on the top 20 gold holders, see Table 2 below.
Table Two: World Official Gold Holdings
International Financial Statistics, October 2014
Source: World Gold Council, IMF data
Why do central banks purchase gold for official reserves? Bhatia explained, "central banks purchase gold for three reasons: 1) diversity, 2) lack of credit risk —it is not an obligation 3) liquidity."
"Emerging markets have very strong, healthy foreign currency reserves —$200-$300 billion. They are turning to gold as a way to reduce dollar reserves. It is great to have an asset that can be relied upon if there is another financial crisis. It is a way to reduce credit risk to the U.S., Euro area and Japan," said Bhatia.
Total foreign reserves held by central banks has surged sharply over the last 14 years. "In 2000, there was two trillion in foreign reserves, now there is 13 trillion in foreign reserves. There is desire for diversification away from the dollar and the euro. Emerging market central banks have such strong allocations to the dollar and the euro they have been looking at other assets for diversification including the Chinese renminbi, Australian dollar, Canadian dollar and gold," Bhatia said.
Looking ahead what can we expect to see from central banks in terms of gold purchases? Most likely more of the same. "We expect central banks to be consistent buyers of gold. We are looking at steady as she goes. We expect Russia to continue to buy gold and we don't expect major sales from anyone," concluded CPM Group's Christian.
By Kira Brecht, Kitco.com
Follow her on Twitter @KiraBrecht