Gold – When Central Banks Buy, Time to Sell

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Precious Metals

Well, if past performance is anything to go by, we should all be selling gold because central banks have been buying.

As a Brit, it still grates that our inconceivably dim chancellor of the exchequer Gordon Brown, after a 20-year bear market in gold, presided over the sale of about 395 tons of the UK’s gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising a measly US$3.5 billion.

By 2011, that quantity of gold would have been worth over $19 billion – so the sale was dubbed Brown’s Bottom. So when I hear central banks are buying gold again, it says to me, “Sell!”

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But are central banks buying? And if so, which ones?

Well, the most recent high profile buy was Iraq.

Their Central Bank bought 36 tons in March, worth about $1.5 billion at current prices, according to the FT, adding to its 29.8-ton haul mostly made in 2012. Not that this puts Iraq in the big league, but the Central Bank stated the intent was to support the currency and public finances. However, their holdings still only represent 2 percent of the country’s reserves.

Countries such as Russia, Kazakhstan and China have significantly boosted their reserves by buying up domestic production, according to the FT, with Russia more than doubling its reserves to 1,034.7 tons or 8.3 percent of its reserves, according to USA Today. Even so, that puts Russia only at seventh in the world’s league table.

France is at No. 4 with 2,435.4 metric tons, equivalent to a massive 64.3 percent of its reserves, while Italy is at third place with 2,451.8 tons or 65.9 percent of its reserves – not that a high level of gold reserves stopped either country from getting a recent credit downgrade. Germany is at second place with 3,387.1 tons or 67.1 percent of its reserves and the most gold-backed nation remains the US, with 8,133.5 tons or 71 percent of reserves.

The UK? Well, it does have a little left – a paltry 310 tons at last count, leaving it at 18th place in global league tables, but London does have the pleasure of holding everyone else’s gold. In fact, three locations in the world officially hold a whopping 15,400 tons – 6,200 tons is in the US Federal Reserve, while Fort Knox in Kentucky holds another 4,600 tons and The Bank of England holds 4,600 tons. Much more is held in private vaults in London and New York for governments around the world, including Iraq.

The dark horse is – no surprise here – China.

Officially the country holds 1,054.1 metric tons, just 1.1 percent  of its massive reserves, but experts believe it is now much more as these were last declared in 2009. Since then, calculations of imports, domestic consumption and domestic production reveal some large gaps. USA Today’s calculations suggest the real figure could be 2,000-3,000 tons, and with China’s declared position to reduce exposure to US Treasuries and wary of the Euro during the Euro crisis, it is logical the PBOC may have been acquiring domestically refined gold.

Some suggest it is Chinese buying that has been supporting the price lately; certainly there hasn’t been much interest from elsewhere, apart from the previously mentioned Iraq, yet ETFs have showed tentative interest in the market again after a year of dumping the stuff. In February, SPDR Gold Trust posted its first net inflows since December 2012 – hardly the start of a new trend line, but some will take it as the end of falls.

Now if the UK starts buying again, I will really know it is time to sell.

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