Many countries’ central banks are buying gold in part because of its very affordable price. Several countries have made their first major purchase of gold reserves, some for the first time in over 10 years. Could we be seeing an upward trend for gold soon?
This summer, Poland made its largest gold investment since 1998 adding about nine tons to its bullion reserves in July and August. Thought the country still ranks outside the 30 biggest holders, it is also one of the largest additions by a European Union nation since 1998 making their reserves the highest they have been since 1983.
Economists identify gold’s recent drop to the lowest price in more than a year as a catalyst for Poland’s new purchase.
“The National Bank of Poland reserve management policy is based on diversification,” said Marcin Mazurek, a senior economist at mBank SA. “Perhaps the basic criterion is the low price of the gold, combined with the expectation for higher global inflation.”
Poland’s purchase “suggests gold’s appeal to central banks might be widening,” Matthew Turner, a strategist at Macquarie Group Ltd. In London, said in a recent report. “A broader and more representative base of central bank buyers can only be good news [for the gold market.]”
And according to Natalie Dempster, managing director of central banks ad public policy at the producer-funded World Gold Council, countries may be buying more gold amid expectations that the international monetary system will likely shift away from the dollar toward other currencies.
“Central banks have three main objectives when they are thinking about reserve assets: to keep their assets safe, to keep their assets liquid and to generate returns,” Dempster said.
“Gold can help to meet all three policy objectives.”
It seems that many central banks are purchasing gold this year alone. Central Banks have bought a total of 264 tons of gold this year, by far the most at this stage of the year in the last six years, according to Macquarie analysts.
Russia has by far been the biggest buyer in gold recently passing China for the fifth largest gold reserves in the world. Russia’s gold investments are largely attributed to the nation’s attempt to diversify from American investments; Russia mainly sold American bonds in order to purchase their gold. Currently, it is estimated that Russia holds nearly 1908.8 tons of gold.
France (2,436 tons) and Italy (2,451.8 tons) are the next two countries with the largest gold reserves in the world. The International Monetary Fund (IMF) is reported to have more gold reserves than Italy (2,814.1 tons).
In 2016, Germany put as much as $8 billion into gold coins, bars and exchange traded commodities, setting a new annual record for Germany and making it the world leader in gold investing at that point in time.
In a country that has gone through eight different currencies over the last 100 years, its no wonder that a 2016 survey found that 42 percent of Germans trust gold more than they do traditional paper currency.
Previously, Germany had rarely registered on any radar in regards to gold, as their first ETC didn’t even appear on the market until 2007. But after the financial crisis in 2008, the Germans sought a more reliable store of value as German investors worried about the state of their own banking system.
This led to the European Central Bank slashing interest rates, and smaller banks charging customers to hold their cash while yields on German bonds dropped into the negative. The combination of these events piqued German investors’ interest in gold.
Over the last 5 years, Germany’s central bank, The Deutsche Bundesbank, repatriated more than 675 metric tons of Cold War-era gold from New York and Paris. Today the central bank of Germany has the second largest gold reserves in the world (3,371 tons), following the Federal Reserve in the United States (8,133.5 tons).
These countries’ investment in gold seems to serve as a safe haven for the possibility of any sort of economic downturn, turmoil or recession. As countries diversify away from bonds and more toward gold, WGC analysts still believe there is room for further growth, citing a survey that shows latent demand in Germany holding strong with 59 percent in agreement that “gold will never lose its value in the long term.”
The Reserve Bank of India has also recently bought gold for the first time in nearly a decade in the last year, potentially signaling that gold may be making more of a rise in the near future. The RBI’s purchase of nearly 8.5 tons of gold increases their reserves to 566.23 tons as of last years annual report. That number is currently up to 573.10 tons. The RBI’s last major purchase of gold was in 2009 when it purchased 200 tons from the IMF in order to increase its reserves.
The RBI’s decision to buy gold is significant because unlike many other central banks, the RBI does not regularly trade gold. The RBI had sold close to $10 billion worth of US treasury securities between April and June of last year.
Other countries including the Netherlands, Japan, Switzerland, China, Kazakhstan, Turkey, and the Philippines have also recently added to their gold reserves in attempts to diversify from foreign currency.
But not all countries are buying in on gold. There are some who are using gold to pay off substantial national debts. Venezuela has been the largest seller of gold, selling nearly 25 tons of gold last year.
The confidence in gold’s future and the investments from various international central banks is good news for all gold investors. While central banks are continuing to stock up on gold, perhaps the value of gold (which has remained fairly stable the entire year) could being to rise based on the interest of larger countries and their central bankers.