LAWRIE WILLIAMS: Central Banks keeping up gold buying pressure – or are they?
This week the World Gold Council (WGC) produced its latest, always insightful, Gold Demand Trends report which suggested overall that demand for the yellow metal remains strong, although with the suggestion that new mined gold supply is not yet starting to fall as many analysts have been predicting. Peak gold may not be with us quite yet, although the likelihood remains that any new-mined gold production increase that may arise this year will be small in total.
Last year reported increases in central bank gold holdings were the highest since President Nixon ended dollar/gold convertibility back in 1971 so an additional rise in Q1 this year could prove to be significant, although perhaps not as significant as some have been suggesting. The rises in global central bank holdings were, as far as reported increases were concerned, led primarily by Russia which has almost entirely wound down its dollar related foreign exchange holdings in response to U.S. economic sanctions and other potential measures. However there has always been the suspicion that China has been building its own gold reserves surreptitiously without reporting increases to the IMF which could be adding another dimension to global central bank gold advances.
Now, in its latest Gold Demand Trends report the WGC has stated that Q1 official gold holding increases have advanced by a very large 68% year on year to 145.5 tonnes, but before gold followers get too carried away, around 33 tonnes (over 70%) of the actual rise in reported holdings relates to China which only re-started reporting monthly gold accumulation figures at the end of last year. Whether the nation actually added hidden amounts of gold to its holdings in the first 11 months of 2018 remains shrouded in secrecy. As we have reported here before, the country has a track record of adding gold to accounts it says it has no need to report to the IMF, and only announces these at multi-year intervals when it consolidates these holdings into its official forex figures.
Further, if we extrapolate the Q1 central bank new holding figures over the full year we wind up with a total of only 582 tonnes which is around 70 tonnes less than the rise in 2018 official gold holdings as detailed by the WGC earlier this year. It is obviously early days yet to quantify any trend developing, but just because Q1 saw a big year on year rise in central bank holdings it doesn’t necessarily mean that the full year total will rise by a similar percentage. One should note, for example, that some significant gold purchasers last year – notably Hungary and Poland – have not added to reserves at all this year nor have Mongolia, Tajikistan and Uzbekistan, all important buyers last year but which appear to have sold off some of their gold holdings so far in 2019! Central banks certainly don’t seem to show a concerted penchant for increasing gold reserves so talk of them en masse increasing reserves is looking a little suspect.
However, with the usual suspects – Russia, China, Kazakhstan, Turkey, and perhaps India - all seeming to be adding to reserves on a monthly basis the likelihood is that overall central bank purchases in 2019 will be decently positive yet again, but they won’t necessarily be as strong as the Q1 figures may appear to be suggesting and could well fall short of 2018’s recent record levels. Thus don’t bank on a rise of much more than 550 tonnes total this year. It’s probably best to be conservative in one’s estimates than over-optimistic.
03 May 2019