Central Banks Haven’t Bought This Much Gold Since Nixon Closed The Gold Window

 

Something big is happening in the gold market right now, and nowhere is that more apparent than in central banks of emerging economies. Last year was a watershed in the size of official gold purchases, as banks added an incredible 651.5 tonnes (worth some $27.7 billion) to their holdings, according to the World Gold Council (WGC). Not only is this a remarkable 74 percent change from 2017, but it’s also the most on record going back to 1971, when President Richard Nixon brought a formal end to the gold standard. In the final quarter of 2018 alone, central banks purchased as much as 195 tonnes, the most for any quarter on record, according to leading precious metal research firm GFMS.

 

Net Central Bank Gold Purchases in Fourth Quarter 2018 Were Highest on Record

 

As I’ve shared with you before, central banks have been net buyers of the yellow metal since 2010 in an effort to diversify their reserves away from the U.S. dollar. Last week, I had the opportunity to discuss the issue with SmallCapPower’s Vasudha Sharma. You can watch the conversation by clicking here.

Most Western nations already have a comfortable weighting in gold relative to their total reserves, so the demand is almost strictly from emerging markets. Among the biggest purchasers last year were Russia, Turkey and Kazakhstan, and we also saw China add to its holdings for the first time since 2016. Meanwhile, Hungary, Poland, India and a number of other countries took deliveries for the first time this century.

Central Banks Recognize Gold as an Effective Diversifier and Store of Value

With gold representing a whopping 74 percent of U.S. reserves, the Federal Reserve has historically had the largest position among global central banks. (Venezuela’s weighting, at 76 percent, has lately roared past the U.S., but that’s thanks solely to hyperinflation and its rapidly deteriorating economy. I’ll have more to say on Venezuela later.)

Other countries have a lot of catching up to do—i.e., gold buying—to get to the same level of diversification. Russia, for instance, has the fifth most gold in the world at 2,066.2 tonnes, but this amount represents only 17.6 percent of its total reserves. In sixth place is China, whose holdings (a reported 1,842.6 tonnes) represent a very small 2.3 percent of reserves.

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Moon Kil Woong 2 months ago Contributor's comment

The big question is, are the banks that are very short gold cutting their short positions substantially?