October 4, 2022

Central Banks Rein In Gold Purchases

Central banks were net buyers of 8.4 million ounces of gold during the first seven months of this year. Central banks are forecast to buy 10.5 million ounces of gold on a net basis during 2020, which compares with net purchases of 16.2 million ounces and 17.3 million ounces in 2018 and 2019, respectively.

There are primarily two reasons for the decline in central bank purchases during 2020:

  1. Central bank sensitivity to higher gold prices
  2. Fewer central banks buying

The weakness in central bank net purchases this year can largely be attributed to the sharp increase in gold prices. Central bank buyers have historically been sensitive to gold prices, reducing the amount of gold purchased or completely ceasing to buy gold in a sharply rising price environment. For the period between 2008 and 2019, the correlation between net purchases of gold by central banks and the price of gold stood at negative 0.56.

Another factor that has been weighing on net purchases is a reduction in the number of central banks purchasing gold this year. The People’s Bank Of China, which has been a large buyer of gold in recent years, has not reported any fresh purchases so far this year. Many of the central banks which have been long time net buyers in the recent past have turned net sellers during 2020. The most notable among this group were the central banks of Kazakhstan and the Kyrgyz Republic.

The central bank of Russia, which has been a large consistent buyer of gold since August 2006, suspended indefinitely its gold purchases starting April 2020. The Russian central bank is unlikely to return as a net buyer of gold anytime soon. The sharp collapse in oil prices has shrunk the country’s foreign exchange inflow and government revenue. Russia had been converting a lot of the dollars and euros it had been receiving for its exports into gold as a way of diversifying away from these currencies. Also, Russia’s gold holdings as a percentage of total monetary reserves are larger than other major emerging economies. At the end of 2019, gold accounted for 20.4% of the Russian central bank’s total monetary reserves. Given that the Russian central bank has already built a fairly large hoard of gold and its foreign exchange inflows have slowed, it is unlikely to be in a rush to build its gold reserves further and is also likely to be more sensitive to the price of gold. That said, the second largest net purchase of gold so far in 2020 are made by the central bank of Russia, which added around 900,000 ounces of gold to its holdings in the first quarter of this year.

The largest buyer of gold this year has been the central bank of Turkey, which has added 7.08 million ounces of gold on a net basis to its holdings during the first seven months of the year. The third-largest buyer has been the Reserve Bank of India, which has added 850,000 ounces of gold to its holdings over the same period in 2020.

The central banks of Turkey and India are likely to continue adding to their gold holdings in the coming months. One of the primary reasons these two central banks have been adding gold to their holdings is the weakness in their domestic currencies, which they seek to hedge by purchasing dollar-denominated gold.

While central bank demand is down this year, relative to the past couple of years, central bank demand still is strong by historic standards. Furthermore, any loss in central bank demand is being more than offset by investors who are expected to keep gold prices at elevated levels into the foreseeable future.

Excerpted from CPM Group’s monthly Precious Metals Advisory.

Disclosure: I am/we are long GLDM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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