Central Banks Buy More Gold – Higher Gold Prices in the Near Future?
Central banks moved from being net sellers to net buyers of gold in 2010. This big picture trend marks a sea change.
Central banks had been dumping gold since the 1960s, in an effort to suppress the price and to get out of a noninterest-bearing asset, and into bonds and other assets that produce returns.
Some central banks, like Canada, have reduced their gold reserves to near zero. Australia has 79 tonnes of gold.
The shift to net buying by central banks was driven by Russia and China, who together have purchased almost 4,000 tonnes of gold since 2009.
In effect, developing economies were acquiring gold while developed economies were still reducing gold reserves or just staying even.
Bloomberg recently reported that Germany increased its gold reserves in September by about 2.6 metric tonnes.
This is not a huge amount (Russia buys about 30 metric tonnes per month), but the fact that Germany increased its reserves at all is big news.
This is the first increase by Germany in 21 years.
Germany is the fourth-largest economy in the world, after the US, China, and Japan.
Its purchase breaks the mould of only developing economies buying gold. Now the developed economies are jumping into the pool.
There are several ways to interpret this move. Germany may simply want to diversify its holdings away from Treasuries and other sovereign debt.
Germany may anticipate inflation in Europe and knows that gold is the best inflation hedge. Finally, Germany may see a global move away from US dollar hegemony and could be hedging its bets. None of these reasons are positive for the dollar.
But they are all extremely bullish for gold.
Netherlands central bank praises gold as ‘symbol of solidity’
The relationship between central banks and gold is turning on a dime.
From 1950 to 1980, US gold reserves fell from 20,000 tonnes to 8,133 tonnes, a 60% decline.
In the late 1990s, the UK sold more than half their gold reserves (at the lowest prices in over 20 years and the lowest prices since).
In the early 2000s, Switzerland sold over 1,000 tonnes of gold reserves, which prompted a popular revolt against the sales and a referendum to prevent further reductions (the referendum failed, but the point was made and Switzerland has in fact ceased gold sales).
Finally, the IMF sold 400 tonnes of gold in 2010; that was the last such sale by them.
Over the course of this orchestrated gold dumping, central banks continually disparaged the role of gold as a monetary asset.
In 2012, former Fed Chair Ben Bernanke told a class at George Washington University that gold standards had failed in the past and were not feasible today (which is untrue). Bernanke also described the US gold reserve as a mere ‘tradition’, with no role in the current monetary system.
In 1999, a gold seller’s cartel was organised under the name of the Central Bank Gold Agreement (CBGA).
The CBGA was intended to limit gold sales to 2,500 tonnes per year to prevent crashing the price too much. The CBGA was renewed at five-year intervals in 2004, 2009, and 2014.
Suddenly, the CBGA was not renewed in 2019 and is now a dead letter.
The reason? Beginning in 2010, central banks turned from being net sellers to net buyers of gold. Russia and China have more than tripled their gold reserves since 2009. Other buyers include Mexico, Vietnam, Iran, and Turkey.
Now the enthusiasm of central banks for gold has spread to developed economies as well.
The central bank of the Netherlands (DNB) has recently said that a ‘bar of gold always retains its value, crisis or no crisis. This creates a sense of security.’
The Netherlands is also building a new military facility to protect their gold (the US gold supply is stored in West Point and Fort Knox, both US Army facilities).
We are now in a new age when gold is regaining the respect of central banks and is slowly reclaiming its role as a monetary asset.
This is significant in more ways than one. Above all, it implies much higher gold prices in the near future.
All the best,