LAWRIE WILLIAMS: Central banks only hold gold for traditional reasons. BS?

I append the following quote, which was accompanied by a chart, in the Charts that make you go hmm.. section from Grant Williams’ excellent latest ‘Things that make you go hmm..’ newsletter (www.ttmygh.com)  as it truly emphasises a point I’ve been trying to make here several times over the past few months.

Grant’s observation was as follows:  “Central Banks only hold gold because of tradition (if you believe their nonsense), so it probably comes as some surprise to many that, between them, they have bought more of this ‘traditional’ asset in the first half of 2019 than they have done in any other 1H on record. It’s enough to make the skeptics of the world think they might be concerned about something but... well that would be directly opposed to their assurances that everything is under control so... it’s probably nothing. Just tradition...”  Do I detect a sharp degree of sarcasm here?  Well one would be foolish not to!

It is apparent that the Powers That Be, not only speak with forked tongues, but are beginning to build their gold reserves in prospect of improving their positions ahead of any forthcoming global financial reset which seems to be approaching rapidly.  For most of these central banks it is a case of ‘too little too late’ though. 

It also makes the then U.K Chancellor, Gordon Brown’s decision to sell off half the UK’s gold holdings at the bottom of the market some 20 years ago – a timing now irreverently known as ‘Brown’s bottom - a particularly abject move’.  This was, in hindsight, a remarkable misjudgement by a UK political leader, and subsequent Prime Minister, who professed economic prudence and was the self-proclaimed ‘saviour of the world’s economy’ over his role in the implementation of quantitative easing post the 2008 great financial crisis.  The UK now languishes as the world’s 18th largest national holder of gold as reported to the IMF with a holding hugely below many countries with considerably smaller GDPs.  If the UK had held on to its gold it would currently be in around 9th place in this gold hierarchy, although still hugely behind some of its more prudent European neighbours like Germany, Italy and France, three of the EU’s economic powerhouses.

Top of the tree, according to figures reported to the IMF, is the USA, which reportedly holds some 8,133.5 tonnes of gold in its vaults, although this amount is perhaps increasingly being questioned given the continued refusal to allow this gold holding to be independently audited.  The USA is followed officially, by the reported holdings from Germany, Italy, France, Russia, China and Switzerland, all of which report gold holdings of more than 1,000 tonnes.  However, many believe that China, in particular holds considerably more gold than it reports to the IMF given its past record of not announcing its full purchases to the IMF.  One recent report suggests that China might even hold as much as 20,000 tonnes of gold, although we think the real amount is considerably ,lower, although perhaps well in advance of the 1,940 tonnes it currently reports as its holding.

Russia has been far and away the biggest reported accumulator of gold reserves in the past three to four years and we estimate that it could surpass the Italian and French holdings (currently 2,452 and 2,436 tonnes respectively) within the next year or so assuming it still continues to increase its reserves at its current rate.  Latest reported Russian reserves are some 2,230 tonnes.

But what is particularly interesting about central bank gold buying at present is that some countries without a previous gold buying history, seem to be joining the gold purchasers, albeit in relatively small amounts.  This suggests increasing disquiet about the state of the global economy and, if this trend continues, central bank announced gold purchases may play an increasing role in the global gold supply/demand balance. 

At the moment global new mined gold output appears to be at, or around, its peak while gold additions into ETFs are running high, particularly outside the USA, although U.S. gold ETF inflows still remain strong, although perhaps not as dominant as they used to be according to research announced by the World Gold Council and Bloomberg.  This all suggests that gold supply/demand fundamentals may be improving for the gold investor and will eventually filter through into a higher gold price, although this may be resisted by some key central banks and their bullion bank allies.  But, in our view, the force is with gold for the time being and the traditional central bank position on the maintenance of their gold holdings is increasingly looking like hot air designed purely to try and maintain global economic confidence.  As more central banks buy gold, the cracks are widening in this position.

11 Nov 2019

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