LAWRIE WILLIAMS: Russia still not buying gold but Turkey takes up the slack
One of the several positives for gold has been that central banks, led by Russia and China, had been buying significant quantities of gold. However China ceased reporting any gold reserve additions – or at least reported zero increases – from the end of last year, and Russia announced that its central bank would cease, at least for the time being. Gold purchases from April this year. The latter has just announced its Forex figures for July and these show that indeed it has not added to its gold reserves for four months in a row now. They thus still stand at 2,298.5 tonnes – the world’s fifth highest amount according to figures reported to the IMF.
Russia has seemingly ceased its gold purchases in the face of a hugely positive gold market, but this has enabled its gold miners (it is probably the world's second largest gold producer after China) to tap the high prices on the global gold market. This will have been helping Russia's balance of payments numbers which had been severely hit by the fall in global oil and gas prices.
The amounts involved in China and Russia’s cessations of gold purchases are significant. Last year, between them, their central banks amassed over 250 tonnes of gold – equivalent to almost 40% of all central bank gold purchases that year, which totalled, according to the World Gold Council (WGC), a record 650 tonnes. Thus 2020 looks like it will see a sharp reduction in the central bank gold purchase total. But all is not lost – Turkey has been stepping up to fill the apparent shortfall. According to IMF statistics, in the year to end-June, the Turkish central bank had purchased 163.4 tonnes of gold compared with 35.1 tonnes for all of 2019. If this purchasing trend continues for the remainder of the year, the Turkish Central Bank will add some 320 tonnes of gold to its reserves – dwarfing any amount Russia has been purchasing annually over the past several years.
Further to the above, Turkey’s commercial banks have also been buying gold and purchased an additional 170 tonnes in the first 6 months of the current year. So Turkey is currently a hugely significant player in the 2020 global gold supply and demand pattern.
Despite the Turkey central bank’s impressive level of gold purchases in H1, according to the WGC’s half year Gold Demand Trends report total global central bank purchases in H1 came only to 233 tonnes, suggesting perhaps a shortfall of around 30% in total central bank purchases over the full year compared with 2019. This is still an impressive amount but coupled with the decline in Asian consumption this year which is now becoming increasingly apparent. This could have a significant effect on the global supply/demand balance – were it not for the huge inflows we have been seeing into the gold ETF sector.
While ETF inflows so far this year have been vast, they do seem to have been slowing down a little of late and we have even seen the occasional withdrawal so perhaps there will be a bit of a slowdown in H2 given some of the euphoria seems to have gone out of the gold market and prices have fallen back from their recent peaks. It won’t take much for the upwards path to resume once the northern summer is past, but with general equities still looking strong, some of the presumed safe haven demand may be falling away. Nevertheless gold has been a great investment so far this year (up 28%), as we had been predicting – but maybe it’s drawing its breath before the upards momentum kicks in again. The percentage gain has been dwarfed by that in silver (up over 50% year to date) but the latter was starting from a ludicrously reduced level.