Central banks net buyers of gold

Allan Seccombe | Wed, 19 Aug 2009 09:20

[miningmx.com] -- CENTRAL BANKS were net purchasers of gold for the first time in a long time, curtailing supply of the metal to the market that saw continued strong investment demand in the second quarter of 2009, the World Gold Council said.

While total gold supply rose 14% in the three months to end-June as mining companies slowed their de-hedging programmes, the amount of gold supplied into the market was still 23% below that of the previous quarter.

The main reason for that is the 41% fall in the supply of recycled gold, which the WGC report suggested was related to a decrease in profit taking and distress selling.

The central banks within the Central Bank Gold Agreement (CBGA) had an agreement to sell up to 500 tonnes of gold a year, but they have slowed their sales, the report said. The new agreement starting in September has reduced the quota to 400 tonnes a year.

“The central bank sector had a dampening impact on supply – net purchases of 14 tonnes were recorded in Q2’09 compared to net sales of 69 tonnes in Q2’08, the figures indicating the first net purchase by central banks for a considerable length of time,” the WGC said.

Rozanna Wozniak, the investment research manager at the WGC, said central banks outside the CBGA were taking a closer look at their reserves and wanting to increase their diversification to minimise risk.

The banks within the CBGA appear to have sold all they want to sell but still, on the whole, own large stocks of gold.

"They central banks outside the CBGA are asking, 'Am I diversified? Is my exposure to the dollar too heavy and what should I do to diversify?'," Wozniak told Miningmx.

Central banks in Russia, China and the Middle East have heavy exposure to the dollar and are now looking at buying gold.

"It's a belief that gold is a good store of wealth as well as the lack of diversification in their assets. They have extremely heavy exposure to one country and that country's assets, being the US, and there are concerns about the US dollar. Gold is a hedge against the US dollar.

"I think it will be a gradual process. We are on the margin of I believe of seeing some of them thinking about their asset alocoation and exposure and only time will tell," Wozniak said.

Figures compiled for the WGC by London-based metals consultancy GFMS showed overall gold demand sliding off recent high levels because of weak economic conditions and high metal prices, which curtailed jewellery buying by 22% year-on-year for the June quarter.

Investment demand for gold rose 46% to 222 tonnes in the June quarter compared to a year earlier, but this is off the highs seen in the prior three quarters when the global economic crisis was at its peak.

Inflows into gold-backed exchange-traded funds (ETFs) fell to 57 tonnes from the first quarter's 465 tonnes.

“The global economic downturn has certainly had a major impact on the purchasing power of gold consumers, as have the high local prices and dollar volatility," said Aram Shishmanian, CEO of the WGC.

"However, we continue to see pockets of solid demand in many non-western markets on dips in the gold price. We expect consumers, particularly in India, to look for opportunities to buy back the jewellery that has been recycled over recent quarters,” he said in a statement.