Dedollarization and Uncertainty drive Central Bank Demand for Gold

Russia and China continue to Buy Gold

By janskoyles November 10, 2016 0 Comments

Dedollarization and Uncertainty drive Central Bank Demand for Gold

Central banks added 81.7t to their gold reserves in the third quarter
Total central banks purchases in the year-to-date reach 271.1t.
Fellow-SCO member Kazakhstan and Belarus also had to holdings
90% of reserve managers intend to increase or maintain gold reserves.
“The case for gold remains compelling for reserve managers” state WGC
Unconventional monetary policies will underpin gold demand in coming years.

Central banks added 81.7t to their gold reserves in the third quarter, bringing total purchases in the year-to-date to 271.1t. This was a fall from 168t purchased in the previous quarter. Much of this has gone unnoticed by the mainstream media, something which seems shortsighted given the monetary and geopolitical implications both this and recent elections results may lead to.

The World Gold Council described recent buying as a ‘more measured’ approach to previous years. Between Q3 2014 and Q3 2015 407.7t were purchased by central banks. The data was slightly skewed last year as China contributed their gold reserve data for the first time since 2009.

Gold buying will not stop

The World Gold Council and other mainstream analysts do not appear unduly worried about the fall in gold demand from central banks. The current geopolitical and economic environment provides an irrefutable argument for central banks, as well as investors, to hold gold.

“The case for gold remains compelling for reserve managers amid the prevalence of negative interest rate policies and diversification away from the US dollar” WGC, Q3 report.

Commenting in the aftermath of the US election Juan Carlos Artigas, director of the WGC’s investment research, drew attention to the politics of anger and argument that are playing out across the world stage, signalled by both Brexit and the US election result.

“This trend, combined with uncertainty over the aftermath of years of unconventional monetary policies measures, will firmly underpin investment demand for gold in the coming years,”

This was reflected in a recent WGC survey of 19 central bank reserve managers which found nearly 90%have plans to either increase or maintain their gold reserves at current level.

In a research note from Simona Gambarini of Capital Economics, he argues that “the case for gold as a reserve asset remains strong”, given around one third of global government debt now has negative yields:

In particular, we continue to expect central banks from developing economies to be the main source of demand from the official sector in the future, as they typically have much lower gold holdings as a percentage of total reserves compared to those in advanced economies.

However, for some whilst there is an air of uncertainty following political events of 2016 and a tricky economic environment, this is not enough for central banks to add more gold to their reserves. In a recent note Nell Agate, a Citi analyst, stated ”While negative real interest rates and low sovereign bond yields across several key currencies and countries may encourage inflows into gold, particularly as there are limited alternatives for safe-haven / reserve assets, we expect to see reserve holdings maintain current trends.”

Russian love for gold

Those central banks who we have become used to seeing purchase gold on an ongoing basis continued to do so – Russia (43.9t), China (15.2t) and Kazakhstan (10t). Belarus also added over 3t to their reserves.

The Central Bank of Russia has outpaced the PBOC by nearly 150t in the last seven years, and has been the world’s largest central banks buyer of gold reserves for some time. This trend is expected to continue. Earlier this year it indicated that over the next 3-5 years it will look to expand its holdings to some half a trillion dollars.

This push for more gold is now driving the Russian supply chain. In May 2015 Russian Central BankGovernor Elvira Nabiullina stated that she saw no need for the Russian government to buy up all domestic gold production (as is done in China) as the central bank’s gold demand could be satisfied on the open, international market. However, F. William Engdhal reports that so central is gold to the monetary policy that the Central Bank is now buying from domestic mining stocks to satisfy their demand. This is particularly notable given Russia is the world’s second largest gold producing nation.

‘Dedollarization’ drives the SOC’s love for gold

When looking at the top gold buyers, one must remember that Russia and China are the key members in the Shanghai Cooperation Organization (SCO). The project includes former Soviet Union states as well as India and Pakistan.

The aim of the 16 year old organisation is to unite those nations in the face of increasing American expansionism. The group has discussed trade, a new currency and a unified energy system. The currency is what has many people nervous.

At a time when Russia is often declared a failed state by the US, the fact is that their economy is, in some ways, in far better shape. Namely their very low debt-to-GDP ratio and movement towards a ‘good as gold’ currency.

As of October the Central Bank of Russia held $88.2 billion in Treasurys, a significant change from the $131.8 billion held in 2014. This move has been labelled as dedollarization, and it is thought that this process is funding gold purchases as the country moves to prop up its reserves as the Russia ruble has suffered hugely since the collapse in crude oil. Not to mention lines to cheap credit were cut thanks to US and European sanctions and inflation is well into double figures.

“Notably, the Russian central bank has been selling its holdings of US Treasury debt to buy the gold, de facto de-dollarizing, a sensible move as the dollar is waging de facto currency war against the ruble,” writes F. William Engdahl.

That Russia feature so prominently in gold buying statistics is of no surprise. As Goldcore reported last year, Russia has made no secret of its desire to hold gold, and to increase their reserves. Monetary policy manager Dmitry Tulin stated, “The price of it swings, but on the other hand it is a 100 percent guarantee from legal and political risks.”

Take control of uncertainty with gold

Yesterday we saw the price of gold surge 5% on the back of Trump’s ‘surprise’ victory in the US elections.

Much of this was driven by the uncertainty that an inexperienced President would bring. This morning the markets have largely recovered from the shock, however macroeconomic, systemic, geopolitical and monetary risks remain heightened. This is something that the Russians, along with China and their allies are all too aware of.

Their moves to diversify into gold and to keep the safe haven central to their monetary policy is something that should be a lesson to investors. The idea that gold offers a ‘100% guarantee’ is alluring in a world that is being influenced by a politics of anger and economy of instability and uncertainty.

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