Will central banks add to the demand factor for gold?
'The dip in the price of gold in early autumn failed to do much to dampen demand from the central banks. In fact, their buying rocketed. This from the FT's Jack Farchy: Central banks made their largest purchases of gold in decades in the third quarter, as a sharp drop in prices in September accelerated the shift to bullion as a means of diversification. The scale of the buying, at 148.4 tonnes on a net basis, was far bigger than previously disclosed, surprising some traders.
The report by the World Gold Council, industry lobbyists, on which the story is based confirms a few of Money Supply's earlier suspicions about why central bank demand would to remain strong, or even rise, on the back of the dip in price.
Central banks are buying gold largely for historical reasons and so are not influenced by volatility in the price to the same extent as other investors.
Most central banks have traditionally held a certain proportion of their reserve assets in the form of gold, though this figures differs vastly from institution to institution. (Gold accounts for a little more than three quarters of the Fed's reserves, and several European central banks hold similarly high proportions, while others, such as Brazil, hold just 0.5 per cent of their reserves in bullion).
Many emerging market economies have stockpiled reserves over the past decade. They have, therefore, had to buy gold in recent years because, up until then, their buying had not kept pace with their accumulation of reserves. And, having largely bought US Treasuries as they accumulated foreign currency, emerging market central banks now consider themselves over-exposed to the dollar, for which gold is a good hedge.''