Central Bank Demand to Change Gold, Silver Markets and Prices

  • Print

There is a tide in the affairs of gold that is changing the entire shape of the gold market. We are not just talking about the demand side but the supply side as well. Neither the gold market nor the gold price has factored in these changes yet. And the changes are designed to affect the gold market both unobtrusively and over time. The developed world markets are myopically riveted to short-term factors in the developed world’s economies, distracted from reacting to forces considerably greater than those. The changes are significantly deeper than we saw in the 1970’s. By extension, the forces involved will change the future of the silver price as well. These forces will prove so decisive because they are not price-dependent or price-sensitive.

We are currently watching the final moves of a long-term consolidation period, in the near-term and ahead of a strong move either way. A look at the bulk of market commentators shows they are pretty well split on which way the gold and silver prices are headed, up or down? It depends whether the short-term traders take control of the precious metal prices, or whether the forces we are about to describe will take over. It could be a combination of both, with short-term forces breaking resistance, or support, initially, until new pressures take over and force traders and speculators to go with them. We shall see!

We will be tracking each step of the way and keeping subscriber’s fingers on the pulse.

So what are these new forces, or are they old forces re-shaped?

Let’s look at the central bank demand first.

Central Bank Gold Buying and Gold in Reserves

In the last fortnight we heard that central banks continue quietly to buy gold according to the I.M.F.

  • Russia bought 16.55 tonnes in March.
  • Mexico bought 16.81 tonnes in March.
  • Turkey bought 11.48 tonnes in March.
  • Argentina bought 7 tonnes in March.
  • Kazakhstan bought 4.3 tonnes in March.

Other central banks bought smaller amounts. A total of 12 central banks were buyers. We have no reason to believe that this well-established trend will change. Inscrutable China does not report its purchases because it uses a separate Chinese agency to do so, which last handed over 600 tonnes in 2009. Expect the next handover in two years time. 

Gold Investors should weigh this feature of the gold market very heavily as this emphasizes the monetary aspect of gold, which is completely different to any other type of demand.

To give us perspective, just take a look at who holds the approximately 30,000 tonnes of gold in their reserves:

World Official Gold Holdings

International Financial Statistics, April 2012*

Tonnes

% of reserves**

Tonnes

% of reserves**

1 United States 8,133.5 77.1% 51 Brazil 33.6 0.5%
2 Germany 3,396.3 74.0% 52 Slovakia 31.8 68.8%
3 IMF 2,814.1 1) 53 Ukraine 28.0 5.1%
4 Italy 2,451.8 73.8% 54 Ecuador 26.3 44.3%
5 France 2,435.4 73.3% 55 Syria 25.8 8.1%
6 China 1,054.1 1.8% 56 Morocco 22.0 6.1%
7 Switzerland 1,040.1 18.6% 57 Nigeria 21.4 3.3%
8 Russia 879.2 9.7% 58 Serbia 14.3 5.3%
9 Japan 765.2 3.3% 59 Cyprus 13.9 59.6%
10 Netherlands 612.5 62.5% 60 Bangladesh 13.5 7.9%
11 India 557.7 10.5% 61 Jordan 12.8 6.1%
12 ECB 502.1 35.1% 62 Cambodia 12.4 16.9%
13 Taiwan 422.4 6.1% 63 Qatar 12.4 3.0%
14 Portugal 382.5 91.5% 64 Czech Republic 12.4 1.6%
15 Venezuela 365.8 69.9% 65 Colombia 10.4 1.8%
16 Saudi Arabia 322.9 3.2% 66 Sri Lanka 9.7 8.4%
17 United Kingdom 310.3 17.6% 67 Laos 8.9 41.8%
18 Lebanon 286.8 32.6% 68 Latvia 7.7 6.0%
19 Spain 281.6 32.6% 69 El Salvador 7.3 15.6%
20 Austria 280.0 58.0% 70 Guatemala 6.9 6.3%
21 Belgium 227.5 41.3% 71 Macedonia 6.8 13.9%
22 Turkey6) 198.1 12.6% 72 Tunisia 6.7 4.8%
23 Algeria 173.6 5.1% 73 Ireland 6.0 15.7%
24 Philippines 156.2 11.4% 74 Iraq 5.9 0.5%
25 Thailand 152.4 4.8% 75 Lithuania 5.8 4.3%
26 Libya 143.8 7.6% 76 Bahrain 4.7 5.5%
27 Singapore 127.4 2.9% 77 Tajikistan 4.5 57.9%
28 Sweden 125.7 13.7% 78 Mauritius 3.9 7.9%
29 South Africa 125.0 14.3% 79 Mongolia 3.5 7.1%
30 BIS2) 119.0 1) 80 Canada 3.4 0.3%
31 Greece 111.7 83.3% 81 Slovenia 3.2 17.6%
32 Mexico 105.8 3.9% 82 Aruba 3.1 23.7%
33 Romania 103.7 11.6% 83 Hungary 3.1 0.4%
34 Poland 102.9 5.8% 84 Kyrgyz Republic 2.6 7.8%
35 Kazakhstan 91.9 14.8% 85 Mozambique 2.5 5.4%
36 Australia 79.9 8.6% 86 Luxembourg 2.2 12.4%
37 Kuwait 79.0 13.7% 87 Suriname 2.2 13.3%
38 Egypt 75.6 24.7% 88 Hong Kong 2.1 0.0%
39 Indonesia 73.1 3.7% 89 Bosnia and Herzegovina 2.0 2.7%
40 Denmark 66.5 4.4% 90 Iceland 2.0 1.3%
41 Pakistan 64.4 21.4% 91 Papua New Guinea 2.0 2.6%
42 Argentina 54.7 6.7% 92 Trinidad and Tobago 1.9 1.1%
43 Korea 54.4 1.0% 93 Albania 1.6 3.6%
44 Belarus4) 49.6 29.3% 94 Yemen 1.6 1.9%
45 Finland 49.1 25.6% 95 Honduras 0.7 1.3%
46 Bolivia 42.3 18.9% 96 Paraguay 0.7 0.8%
47 Bulgaria 39.9 13.2% 97 Dominican Republic 0.6 1.0%
48 WAEMU3) 36.5 14.6% 98 Malawi 0.4 9.7%
49 Malaysia 36.4 1.5% 99 Mauritania 0.4 4.0%
50 Peru 34.7 4.0% 100 Malta 0.3 2.7%

This shows that these central banks see gold as a very important reserves asset. This means that when a nation is facing extreme situations, the one asset that they can use as acceptable international money is gold.

As you can see from the table above, gold in national reserves serves much the same function as a nation’s army does –while it may not be used, it deters enemies and rebellions internally. Likewise where a central bank holds sufficient ounces of gold, their ability to weather financial storms, which are currently growing in number, grows. The presence of gold in a nation’s reserves inspires confidence and deters the storm and gives lenders far greater leeway to give more credit.

For some years now, gold has been mobilized by nations and through the Bank of International Settlements to facilitate borrowings and to ensure interest rates on these loans were held down. Furthermore, gold inspires confidence when government-issued money does not. And confidence is a delicate commodity!

 Commercial Banks Buying Gold

It’s possible that the Basel Committee agrees to banks using gold as Tier 1 Capital, which would create substantial demand for physical bullion, but the physical gold market can only bear demand from Central Banks. If Commercial Banks turn to gold as an asset, then there wouldn’t be enough gold to feed both Central Banks and Commercial Banks.

Globally, Central Banks cannot afford to find themselves in competition with their banks over gold. Just as citizen’s gold remains vulnerable to the confiscation of gold, so Commercial Bank holdings of gold would be equally vulnerable.

Confiscation of private gold would allow Central Banks to boost their gold holdings and that’s a distinct possibility.

Direction of Central Bank Gold Buying

As an indication of the direction that central banks and nations are moving in, we note that four important policies Central Banks are following regarding gold that are now in place to ensure nations accumulating gold retain it either in citizen’s hands or in Central Bank hands.

  1. China has made it illegal to export gold, thus ensuring that all gold that enters the country stays in the country. This volume is growing In February; Hong Kong exported 39,668 kilograms of gold to Mainland China, up from 32,948 kilos in January. In the first two months of this year, the city shipped almost seven times the amount of gold to China than in the same period in 2011. This makes citizen owned gold hostage to the will of the government. If push does come to shove they may confiscate that gold.
  2. Where the Central Bank’s home nation produces gold, that gold is being purchased directly by their central bank. Take a look above at the recent purchases of gold in March. Russia buys its locally produced gold. Kazakhstan bought its own gold. Unpublicized as yet, we believe that China buys its entire local production and may be a buyer of at least part of the imported gold through Hong Kong. China is actively buying gold mines for the purpose of buying their gold direct for its reserves.
  3. Many Central Banks hold their gold in the Bank of England vaults, the Federal Reserve or other leading Central Banks vaults, leaving them vulnerable to political action against them. Iran and Venezuela have repatriated their reserves to remove that risk. Over time, expect other nations to follow suit as political and financial risks increase. Expect a rise in monetary risks as debt and currency instability problems grow.
  4. Of particular significance is the fact that the Central Bank buyers of gold are from the emerging world. While developed world Central Banks have huge amounts of gold in their vaults, the new buyers are from the newly wealthy nations. Their holdings are tiny compared to U.S. and European Central Banks. Certainly, as a proportion of the $3.2 trillion that China holds in its reserves, the proportion of gold holdings there is infinitesimal. They have different objectives to the developed world financially and will continue to buy gold irrespective of developed world opinion.

Waiting for the Offer and ‘Ducking the Market’

In addition, there is a major trend to avoid the global ‘open’ market when buying and where possible because the moment professionals in the market are aware of the presence of a central bank, prices tend to jump. That’s why the professional dealers for the Central Banks wait for the offer of gold from the market, which usually happens ‘on-the-dip’, so obscuring their presence and impact on the gold price. That’s why any fall in the gold price is short-lived and becoming shallow over time.

The advantage of a Central Bank buying its local production is: (1) it is first invisible as supply to the market evaporates before arriving there and (2) it ensures an ongoing supply of gold to the central bank, so long as local production persists.

Member’s only: What This Means for Gold, Silver.

Get the rest of the series. Subscribe @ GoldForecaster.com / SilverForecaster.com.

Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

CLICK HERE to subscribe to the free weekly Best of Financial Sense Newsletter .

About Julian Phillips

Quantcast