LAWRIE WILLIAMS: Central Bank gold buying slipping back, but ETF demand compensating

Contrary to the predictions of the major gold analysts, Central Bank gold purchasing may well be on the wane this year – indeed with forced gold sales from Venezuela, and possibly from some other countries, the equation may be moving closer to parity than the gold bulls would like to believe.  Whether this will actually impact the path of the gold price remains to be seen given the Central Bank purchases have been more than replaced by purchases into the major gold ETFs.

What evidence do we have for this?  Last year there were only two significant Central Bank gold purchasers, Russia and China, which between them accounted for around 80% of all Central Bank gold purchases.  So far this year such purchases have declined sharply.  Indeed in May, according to officially announced figures, the Chinese Central Bank added no gold at all, and Russia only a paltry 3.1 tonnes bringing their official respective holdings as reported to the IMF to 1,808 tonnes and 1,480 tonnes.   These figures imply the combined total of purchases by the two countries to only around 74.5 tonnes in the first 5 months of the year – equivalent to an annual rate of around 180 tonnes if they both revert to the  average so far.  This is a far cry from last year’s estimated total purchases by the two nations of some 400 tonnes. (China only started announcing official monthly purchases last July, so figures for the first half of the year are an estimate). Towards the end of last year the two countries combined were adding some 30 tonnes plus each month.  This year their purchases have slipped back substantially. The only other consistent Central Bank gold buyer has been Kazakhstan which so far this year has been purchasing gold at the rate of around 2.4 tonnes per month.

But this year Venezuela has already sold some 43 tonnes out of its reserves to try and keep its faltering economy afloat and avoid loan defaults in the light of the decline in the oil price and hyperinflation.  Turkey has also seen significant gold sales, although these are something of an anomaly as the nation includes commercial bank gold holdings in its figures and the variation in these is hugely more volatile.

The question remains as to why both China and Russia have been reducing purchases this year to such a strong extent.  The fall-off has been over a period when gold prices have advanced over 20% so it could be a perception by the Central Banks that gold is now fully priced, as many bank analysts still maintain, and are waiting to see which way the wind blows looking ahead.  Or it could be that both Central Banks have seen their ultimate gold holding targets already achieved.

But on the figures to date it is hard to forecast net Central Bank gold purchases as likely to exceed much more than 150 tonnes this year – far lower than the 400-600 tonne forecasts by some analysts earlier in the year.

But gold bugs shouldn’t lose heart yet.  Purchases into the major gold ETFs so far this year have been hugely significant.  GLD alone in the U.S. has seen an increase in its gold holdings of 266 tonnes year to date, and with most of its gold held in London appears as though it may be stretching the availability of physical gold in the world’s biggest gold centre.  Taking all the gold ETFs around the world net inflows so far this year have been equivalent to more than 400 tonnes, more than making up for the fall in Central Bank gold purchases, and also compensating for what appears to be much weaker gold demand from Asia so far.  Purchases of physical gold by investors in the West have also been very strong so far in 2016.

21 Jun 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com