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LAWRIE WILLIAMS: Central Banks turn net gold sellers in August – but don’t panic.

After many successive months of gold purchases, the World Gold Council (WGC) noted that August saw central banks switching from being net buyers to net sellers – largely due to a big sale of gold (31.7 tonnes) from Uzbekistan.  Turkish commercial banks, which had also been propping up the WGC recorded gold purchases figures, having added just short of 170 tonnes of gold up until end-July, also sold off 3 tonnes in August.  (The WGC records these figures because Turkey includes commercial bank holdings in its overall reserve figures). 

However Turkey’s central bank added an overall 3.9 tonnes in August – but this was a substantially lower monthly figure than in previous months this year.  In total, the Turkish central bank has added some 194 tonnes for the year to end-August and had largely replaced Russia as the world’s leading central bank gold purchaser now that the latter has ceased making monthly gold purchases as from April this year.  But the latest lower purchase level may well imply that the country will no longer be purchasing gold at its recent rate and may even become a net seller.

Thus it looks like the somewhat depressed economic figures now being recorded for some countries due to the coronavirus pandemic may be having an impact, leading to sales of gold from countries with strong reserves to try and prop up their domestic economies.  At least that was, apparently, Uzbekistan’s reasoning behind its gold sale from its central bank which still holds almost 300 tonnes of gold in its reserves.  The nation is also a major gold producer with one of the world’s largest gold mines – Muruntau – located there and, apparently it has also been substantially increasing its exports of newly mined gold to keep its current account looking healthy – a similar move to Russia which has also been pushing its gold miners to sell their product on international markets..

The WGC thus reports that global central banks sold a net 12.3 tonnes during August, continuing this year’s trend of a slower pace of accumulation compared to recent years. Purchases were concentrated amongst regular buyers: Kyrgyz Republic (5 tonnes), India (4 tonnes), Turkey (3.9 tonnes as mentioned above), the UAE (2.4 tonnes), Qatar (1.6 tonnes), Mongolia (1.3 tonnes), and Kazakhstan (1.3 tonnes). These purchases were comfortably outweighed by the Uzbekistan sale however.

Virtually the whole world is in a very different financial position after the spread of the COVID-19 virus pandemic virtually everywhere. And many countries need to find funds to help try and alleviate the adverse economic effects of virus lockdowns on their populations.  Those which may have had the foresight to build up significant gold reserves may thus well decide to monetise some of these to provide the necessary stimulus to try and get their domestic economies back on track so we may well see a spate of central bank gold liquidations to alleviate some of their financial difficulties as a result.  The gold price has risen quite substantially over the past couple of years and the banks may feel this is thus an opportune time to raise funds in this manner, particularly while investment demand for the yellow metal apparently remains strong in the West and appears as if it may be picking up again in Asia.

Some central bank gold coming back into the marketplace may have a slight depressing impact on the overall supply/demand fundamentals for gold this year, but investment demand remains strong given the short term political and financial uncertainty that is besetting the global picture.  An additional worrying factor, though, has to be that in times past such downturns in global economies as those resulting from the current pandemic have tended to lead to political unrest – or even war.  We have already been seeing domestic unrest rising in parts of the Americas, Europe and Asia as incomes are adversely affected by virus control measures and rising unemployment.  We have to hope that this will not spill over into more violent confrontations which escalate cross-border.  Even so the mere possibility of such an escalating scenario should keep gold’s safe haven appeal strong and help to absorb any increasing amounts coming into the market from the world’s central banks.  With the price today holding up well above the $1,900 level after the breakthrough on Friday we’ll be surprised if the $2,000 level is not passed again in the next few weeks.

12 Oct 2020 | Categories: Gold

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