Tag Archives: central banks

Central bank gold buying easing from 1H frenzy

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If faltering jewellery demand is a a reason to be concerned about the strength of the underlying gold market, central bank buying has been a clear positive, with 2019 set to be another record year for net purchases.

As of October, the latest available data for most countries, there has been a net addition of 550 tonnes to central bank reserves, 17t more than in the whole of 2018 and far ahead of the amount seen in 2017.

Purchases are slowing, however. By the end of the first half of 2019 net purchases had already reached 390t, an average of 65t/month. In the last four months 160t have been purchased, a slower 40t/month. This figure might rise a little – some countries report late, and the trend tends to be higher – but is unlikely to change much.

To what extent is this a concern? A key reason for the H2 slowdown is Russia, the bedrock of global central bank gold accumulation. Here purchases in 1H were broadly inline with previous years, but since then have been much more muted. This is in line with a new policy adopted by the Central Bank of Russia to reduce gold accumulation and has meant an increased rate of Russian gold exports. As such it looks set to be a drag on the global total going forward, albeit one that was inevitable at some point.

Also helping purchases in 1H 2019 was a resumption in Chinese central bank gold buying after a few years hiatus. This too seems to have slowed a bit in 2H but it is too soon to know whether October’s zero purchases marks another cessation of buying or is a temporary pause.

What has prevented an even more rapid slowdown, however, has been an acceleration in purchases from Turkey – on nearly 140t YTD, far higher than in previous years. Whether this will continue is a difficult one to call. Turkey’s central bank gold policy is somewhat confusing given they also hold private-sector gold against reserve requirements (these numbers exclude that), but there has been a policy shift in favour of gold in recent years.

Finally, there is the Rest. And in recent years these have been the great hope of the gold market with a number of big purchases, particular in Europe from Hungary and most impressively Poland. In 1H 2019 other countries added 160t of gold, far more than ever before. In 2H so far barely 10t have been added. However the nature of these purchases mean that they tend to be lumpy.

Indeed if we look at central bank activity, here shown as the number of central banks buying or selling in a month, we see an increase through 2018 in purchases, and a decline in sales, which has since reversed (note I’m excluding the BIS here, correctly, and Turkey, incorrectly, which in most months would add 1 to the purchases line).

If we choose a less granular measure, say 5t/month, the trend is even clearer (note exceptions above).

Source (all charts) – IMF and national central bank websites

So it does look as if there has been a slowdown in central bank buying, and not just because of Russia, which is the biggest impact. One explanation could be the high price, which might make the case for switching into gold harder to explain. But its worth remembering that the pace of buying in 1H 2019 was unprecedented, and current rates are still quite positive. The main concern I have is that Turkey is unlikely to be as reliable a buyer as Russia.

Over time this remains a positive part of the market, and I expect central bank purchases to continue, not least because of the imbalance in global holdings shown here (each country is resized to reflect the size of its gold holdings). For more details see here.

CBGA ends amid a changing world of official sector gold

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Today marks the last day of the European central bank gold agreement (CBGA).

Announced on September 27 1999, and renewed at five-year intervals up to 2014, this was often described as a pact to limit central bank gold sales and lending, though arguably its main role was to improve market conditions sufficiently to give space for hefty European sales. From around the mid-2000s European central banks lost interest in selling gold, and as such the pact became rather pointless, the main reason why in 2019 it wasn’t renewed.

Central bank’s attitudes to gold have changed significantly since 1999. Back then global central bank gold holdings still largely reflected the relative economic strengths of countries at the end of Bretton Woods era (1970s). 85% of the world’s 30,300 tonnes of official gold (excluding that held by the IMF & BIS) was owned by the “Advanced Economies”, and almost all of that, 80% of the world, by the USA and Western European countries.

This geographical skew can be seen clearly in the following map, where I’ve resized the countries of the world by their official gold holdings – shows this clearly (ignore the colours)

Central bank gold holdings by country, September 1999 (source: IMF, Matthew Turner)

Fast forward 20 years and a map redrawn to reflect August 2019 gold holdings and at first glance nothing much has changed – the USA and Western Europe still dominate, even if the latter is somewhat smaller.

But look a little more closely and now Russia and Asia are far more visible.

Central bank gold holdings by country as of August 2019 (source: IMF, Matthew Turner)

This is because there has been a slow shift since the first CBGA was signed in 1999. The “Advanced economies” have sold nearly 4,000t, mainly through the CBGA – with gold holdings in the Eurozone down nearly 1,800t, in Switzerland 1,580t, and in the UK over 300t. Their share is now 70%, down from 85% in 1999. But globally gold held by central banks is up around 1,000t – because “Emerging and developing” economies have added nearly 5,000t. Russia and other CIS countries have been at the forefront of this, but China has also increased its reserves dramatically, and so have a reasonably wide range of other countries, including India, Mexico, and Thailand.

This shift is likely to continue. Certainly central banks are still buying, as noted in Tuesday’s post, with 1H 2019 seeing a record amount. This trend has many drivers but a slow – very slow – loss of faith in the US dollar seems behind some of it, not just in Russia. We’ve not seen any evidence of European selling resuming, indeed the main activity there purchases this year and last by Hungary and Poland. However I would think in another 20 years Western European gold holdings will be lower than they are today.

August: central banks keep buying gold but some signs of fatigue

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One of the reasons to have been bullish gold over the past 12 months was an apparent step-change in central bank purchases. Not just were traditional buyers such as Russia and China continuing to add to their holdings, but new names were getting involved, including – gasp! – even European central banks.

But after a tremendous 1H, in which net purchases reached nearly 400t, or 65t/month, there does seem to have been a slowdown in recent months. From latest IMF data (and direct central bank publications where necessary) I estimate 22t was purchased in July, and just 16t in August. The YTD total is now 423t.

It is likely these numbers are revised higher. Many countries report late, and given a general bias towards purchases this should mean more to come. In particular Turkey, which has added roughly 9t/month this year, hasn’t yet reported for August. Furthermore central bank gold buying has always been lumpy, for example Poland’s 100t purchase this year mostly in June, and so you do get quiet months.

Nevertheless even those buyers who were buying bought less, with just 11t from Russia and 6t from China in August. Furthermore Uzbekistan has sold quite heavily in recent months. The very high gold price, particular in non US dollar currencies, is perhaps having an effect.