Why Central Bank Gold Buying Just Isn’t Enough for Gold Bugs in 2018

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Gold historically has been a major store of value for nations, individuals and other entities. And the reasons that gold is purchased vary wildly from source to source. What is without question is that the world’s largest central banks can greatly drive the price of gold because they have the ability to buy or sell hundreds of millions (or billions) of dollars worth in a single day.

The World Gold Council has released new data for 2018 showing that gold has continued to be an important part of central banks’ foreign exchange reserves in 2018. Yet central banks are far from being the only net buyers of gold in 2018. Gold bugs know that investing in gold in terms of U.S. dollars has been quite painful year to date, though.

Also worth noting is that the International Monetary Fund has signaled that the world’s central banks collectively owned $1.36 trillion worth of the shiny yellow metal at the end of the first half of 2018. That puts gold at about 10% of the total global foreign exchange reserves.

While central banks are more than just an important part of the gold market, the net buying in tonnes (metric tons) has remained quite muted in the past three years. That remains the case in 2018, and in the first half the global central banks still accounted for 10% of demand.

Looking forward, the World Gold Council expects that central bank demand for gold should remain buoyant. Another observation is that diversification will continue to be an important driver of demand. Ultimately, the “transition to a multipolar currency reserves system over the coming years” will play a role for gold.

While the World Gold Council suggests that the central bank activity in buying gold is off to a solid start in 2018, the percentage gains are just not high enough on the surface to create a massive imbalance in demand and supply. Central banks were shown to have added a net total of 193.3 tonnes of gold to their reserves in the first half of 2018. That is an 8% increase from the first half of 2017 and marks the strongest first half for central bank gold buying since 2015.

Will an 8% increase in central bank buying be enough to stave off gold selling from other global parties? So far it has not been the case. In fact, gold started out 2018 at roughly $1,300 per ounce and then went rapidly up to about $1,360 in January, followed by attempted rallies that kept peaking up around the $1,350 per ounce level. Gold is now barely above $1,200 per ounce, and there was a point in August where gold dipped handily under the $1,200 level.

If you go back to the start of 2017, many of the top central banks of nations buying gold are from countries many people would have a hard time identifying on a map or knowing anything about. Russia led the charge (with 383.3 tonnes) at a rate larger than the next nine central bank buyers combined. The data shown by the World Gold Council listed the following central banks from the start of 2017 through the end of July in 2018:

  • Turkey, 125.8t
  • Kazakhstan, 68.4t
  • India, 15.3t
  • Colombia, 7.1t
  • Tajikistan, 5.1t
  • Mongolia, 5.0t
  • Kyrgyz Republic, 4.9t
  • Indonesia, 2.5t
  • Jordan, 2.2t
  • Egypt, 1.7t
  • Philippines, 1.6t
  • Thailand, 1.6t
  • Serbia, 1.1t

And the more recent data and reporting during August showed that Mongolia’s real purchases were 12.2 tonnes and that Iraq had added 6.5 tonnes in the past 18 months.