Some analysts see the Central Bank as one of the key factors in the gold supply/demand equation, specifically, the additions to, or subtractions from, the known national Central Bank gold holdings.
These volumes can make the difference between annual gold supply and demand being in surplus or deficit, and will thereby have a consequent impact on the gold price.
Since the end of 2008, Central Banks have been net buyers of gold, with volumes purchased ranging from a little over 650 tonnes (metric tons) in 2015 down to a little over 300 tonnes last year according to figures from the IMF, but some significant purchases already this year mean that the half-year figure for 2021 already appears to be in excess of last year’s total.
In addition to what appear to be regular central bank purchasers like India, Kazakhstan and Uzbekistan – all of which have added close to 20 tonnes each to their reserves so far this year – there have been significant additions to reserves reported by Hungary (63 tonnes in March) and Thailand (90 tonnes across April and May).
Additionally, Brazil has reportedly added 41 tonnes in the past month. Other countries – notably Poland and Ghana – have also intimated they are planning significant additions to reserves in the future, but at unspecified dates.
Poland did buy 100 tonnes of gold back in 2019 so it already has a track record of buying a substantial one-off volume of gold. It makes one wonder whether there are other central banks out there also considering some expansion of their own reserves as some distrust in the US dollar grows given the nation’s current huge indebtedness.
Japan also appears to have added almost 81 tonnes of gold to its official reserves earlier this year, but this is reported to have been an internal transfer between different accounts held by the Ministry of Finance, which adds a degree of distortion to this year’s official global figures.
This transfer between different internal accounts has been a mechanism utilized by China in the past to explain away large gold reserve increases within a single financial year in an attempt to explain figures which might otherwise distort an orderly gold market.
It should also be noted here, though, that China is considered to be far from transparent in disclosure of its real gold holdings – seen by many analysts to be far in excess of the 1,948 tonnes it reports to the IMF.
There is speculation that the Chinese military holds substantial amounts of gold in its own right, as do many of the state-owned banks which some reckon hold some or all of their gold on behalf of the government, and these amounts fall outside what China feels it needs to report to the IMF.
For a number of years Russia was the world’s largest known accumulator of gold for its Forex reserves – in part to reduce its reliance on US dollar-related securities in case America might effectively weaponize these in some kind of global trade war.
However Russia ceased adding to its gold reserves officially last year in April in favor of persuading its gold miners (it is the world’s second largest gold producer according to the latest figures from precious metals specialist consultancy Metals Focus ) to sell their product on the international market.
This policy was enacted to alleviate balance of payments shortfalls, caused by the huge drop in the price of oil and gas, which had been the nation’s primary export earners.
Recently oil and gas prices have recovered substantially, and some believe that the Russian Central Bank might return as a gold buyer. Interestingly it has recently changed the investment policy of its Sovereign Wealth Fund, which is controlled by the Central Bank, to enable the Fund to buy gold which it was prohibited from doing beforehand.
There have been a number of countries which have made some significant changes to their official gold reserves since Central Banks became net buyers. The table below shows the cumulative totals for all those countries which have made significant changes (of more than 10 tonnes plus or minus cumulatively) in their reported reserves since 2010:
Table: Countries which have reported significant changes to gold reserves since 2010 (tonnes)
|China, P.R.: Mainland||+894.2|
|State Oil Fund Azerbaijan||+101.8|
|Turkey (Commercial Banks)*||+606.1|
|Turkey (Central Bank)*||+298.9|
|United Arab Emirates||+55.4|
** Japan reported an 81 tonne increase in its gold reserves in March 2021, the culmination of an off-market transaction between two different divisions within the Ministry of Finance.
The net total of additions to Central Bank gold reserves since 2010 is just short of 5,000 tonnes, led by big inflows into the Russian and Chinese Central Banks. This may have had an important impact on gold supply/demand fundamentals since then, with an overall positive impact on the gold price.
Considering Central Bank additions to their gold reserves seem likely to at least continue for the foreseeable future, they will remain an important global demand component for the yellow metal. Likewise, it should also have a corresponding influence on gold pricing in the future.
As can be seen from the table, a considerable number of Central Banks or state entities (around 30) have been active in selling and purchasing gold for their reserves over the past 12 years.
Some countries, particularly from Europe, do not feature in the above table but had been substantial gold sellers prior to 2010 with sales made under the four Central Bank Gold Agreement (CBGA)s.
The last CBGA terminated in September 2019. To recap, the four CBGAs were five-year periods where European central banks agreed to put a cap on their gold sales, initially prompted by the then UK Chancellor (Finance Minister)’s controversial decision to sell around half the country’s gold reserves between 1999 and 2002 when the gold price was at its nadir.
This is still referred to by some as Brown’s Bottom, after UK Labour Government minister Gordon Brown (later to become Prime Minister) who reportedly made the decision, which many still see as a huge error of judgment given the course of gold prices since then.
It had initially been forecasted that the current year would see another low level of Central Bank gold purchases, in line with the 2020 figure of a little over 300 tonnes. But the recent big, and unexpected, gold purchases by the Central Banks noted above, have caused this to be revised substantially upwards.
Latest estimates put this year’s Central Bank gold purchases at upwards of 500 tonnes (a substantial amount given global new mined gold production is in the order of 3,500 tonnes and possibly shortly to be trending downwards) and thus a key component in any ongoing gold price analysis. This will remain as long as Central Banks continue to increase their gold reserves and currently some analysts see no sign that any cessation of this is likely to occur.
by Lawrence Williams
Lawrence (Lawrie) Williams is a highly regarded London-based writer and commentator on financial and political subjects, specializing in precious metals news and commentary. He graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London. He has contributed articles on precious metals to the Financial Times, Sharps Pixley, US Gold Bureau and Seeking Alpha among others.