As gold prices dropped over the last few months and investors lose faith, central banks have been on the opposite side of the trade. Russia and South Korea are among the biggest buyers, and several small, first-time buyers have also emerged. The actions of central banks all over the world is definitely bullish for the yellow metal.
3/27/2013 @ 3:29PM
Gold has been on a definite downtrend since last October, with bullion falling a dramatic 5.1% in February alone. As prices have dropped and investors lost faith, central banks have been on the opposite side of the trade, gobbling up bullion at a rate of 27-metric tons a month, according to UBS’ gold expert Edel Tully. Russia and South Korea are among the biggest buyers, while several smaller, first-time acquirers have emerged, suggesting global central banks aren’t snubbing the yellow metal in the same way the general market seems to have done, which, in the face of it, is definitely bullish for gold.
Central banks became net buyers of gold in 2011 after 20 years of consistent selling, according to the World Gold Council. And while the yellow metal has fallen consistently every month since October (with the exception of March, where gold is up 1.6%), the trend seems set to continue.
Data compiled by UBS shows central banks bought about 54 metric tons of gold in the first two months of the year; that’s more than 1.9 million ounces, or more than $3 billion at Wednesday’s prices (bullion stood at $1,606.30 an ounce by 3:36 PM in New York). South Korea, for example, announced it a purchase for 20 metric tons in February, while Russia is 19.2 metric tons deep in 2013. Other buyers include Kazakhstan (6.6 metric tons), Indonesia (1.9 metric tons), Bosnia and Herzegovina (1 metric ton), and Azerbaijan, which bought 2 metric tons after having zero gold reserves in over a decade.
UPDATE: As a few commentators pointed out, there was a clear mistake in the original version of this article, both in the headline and in the preceding paragraph (they have been changed now). Central banks bought $3 billion, not $3 trillion, worth of gold in the first two months of 2013.
UBS’ Tully explains:
While the information is backward-looking, the vote of confidence from central banks does help market sentiment when the buying is confirmed. The real value in central bank gold buying, though, is when it occurs and/or when market participants think it is around. During the sharp selloff in February, there was market chatter of official sector activity. And in addition to the buying itself – as revealed in the latest IMF data – the fact that market participants were considering the possibility of central bank involvement then also helped stabilize prices.
Gold has turned marginally positive in March in the face of a new leg of the European sovereign debt crisis. As gold aversion surged, investors bought gold to hedge out tail risk and destructive scenarios, including a Cypriot Eurozone exit and political risk in Italy, where Pier Luigi Bersani has failed to garner support from Silvio Berlusconi and Beppe Grillo of the 5-Star Movement to form a government.
Gold prices surged starting March 15, as the Cypriot banking crisis was erupting, as the euro-dollar exchange rate broke down. The euro is down about 1.5% against the greenback in March, while bullion has gained about the same amount. Gold equities were a mixed bag this month, with Newmont Mining doubling bullion’s returns, Goldcorp coming in flat, and Barrick Gold falling nearly 2%.
Central bank purchases are clearly a bullish sign for investors, but by no means are an indication that the market is ready to turn. With the specter of rising interest rates an improving U.S. economy, along with expectations of a stronger U.S. dollar in the medium-term, gold will have to derive its support from continued flare ups of Europe’s sovereign debt crisis. But, if the U.S. continues on its upward path and Bernanke’s bloated balance sheet begins to feed inflation, gold may once again find its legs.
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