Commodities & Metals

Why Central Bank Gold Buying Just Isn't Enough for Gold Bugs in 2018

Jon C. Ogg

Published: September 20, 2018 11:05 am

Last Updated: January 11, 2020 5:36 pm

Gold historically has been a major store of value for nations, individuals and other entities. And the reasons that gold is purchased vary wildly from source to source. What is without question is that the world’s largest central banks can greatly drive the price of gold because they have the ability to buy or sell hundreds of millions (or billions) of dollars worth in a single day.

The World Gold Council has released new data for 2018 showing that gold has continued to be an important part of central banks’ foreign exchange reserves in 2018. Yet central banks are far from being the only net buyers of gold in 2018. Gold bugs know that investing in gold in terms of U.S. dollars has been quite painful year to date, though.

Also worth noting is that the International Monetary Fund has signaled that the world’s central banks collectively owned $1.36 trillion worth of the shiny yellow metal at the end of the first half of 2018. That puts gold at about 10% of the total global foreign exchange reserves.

While central banks are more than just an important part of the gold market, the net buying in tonnes (metric tons) has remained quite muted in the past three years. That remains the case in 2018, and in the first half the global central banks still accounted for 10% of demand.

Looking forward, the World Gold Council expects that central bank demand for gold should remain buoyant. Another observation is that diversification will continue to be an important driver of demand. Ultimately, the “transition to a multipolar currency reserves system over the coming years” will play a role for gold.

While the World Gold Council suggests that the central bank activity in buying gold is off to a solid start in 2018, the percentage gains are just not high enough on the surface to create a massive imbalance in demand and supply. Central banks were shown to have added a net total of 193.3 tonnes of gold to their reserves in the first half of 2018. That is an 8% increase from the first half of 2017 and marks the strongest first half for central bank gold buying since 2015.

Will an 8% increase in central bank buying be enough to stave off gold selling from other global parties? So far it has not been the case. In fact, gold started out 2018 at roughly $1,300 per ounce and then went rapidly up to about $1,360 in January, followed by attempted rallies that kept peaking up around the $1,350 per ounce level. Gold is now barely above $1,200 per ounce, and there was a point in August where gold dipped handily under the $1,200 level.

If you go back to the start of 2017, many of the top central banks of nations buying gold are from countries many people would have a hard time identifying on a map or knowing anything about. Russia led the charge (with 383.3 tonnes) at a rate larger than the next nine central bank buyers combined. The data shown by the World Gold Council listed the following central banks from the start of 2017 through the end of July in 2018:

• Turkey, 125.8t
• Kazakhstan, 68.4t
• India, 15.3t
• Colombia, 7.1t
• Tajikistan, 5.1t
• Mongolia, 5.0t
• Kyrgyz Republic, 4.9t
• Indonesia, 2.5t
• Jordan, 2.2t
• Egypt, 1.7t
• Philippines, 1.6t
• Thailand, 1.6t
• Serbia, 1.1t

And the more recent data and reporting during August showed that Mongolia’s real purchases were 12.2 tonnes and that Iraq had added 6.5 tonnes in the past 18 months.

It probably sounds like good news that central bank activity in gold buying was up 8% during the first half of 2018. That said, the World Gold Council’s own chart dating back to 2010 shows how muted this central bank buying has been in the past three years compared with the years 2011 to 2015. More data, from outside of the World Gold Council, on what happened to actual ounces of gold owned by investors has been shown below.

Individual and institutional investors had been great buyers of gold in recent years, but the overall trend has been lower and lower gold holdings, if you look at the go-to source. It’s also now actually possible to earn close to 2% interest in short-term debt, and longer-term U.S. debt has risen back above 3%, even if Japan and Europe are still riddled with low and even some negative interest rates this long after the recession. Gold pays no dividends.

Data from the SPDR Gold Trust (NYSE: GLD), which is the largest gold-backed exchange traded fund in the world, quarterly filings have shown a continued decline in the millions of ounces held by the trust. That is compounded into lower dollars when you add in the drop in the price of gold. As of the most available data on September 20, 2018, that was 23.863 million ounces held by the SPDR Gold Trust. But here is how that looks going back each quarter from its 10-Q filings:

• As of June 30, 2018, it held 26.418 million ounces of gold.
• As of March 31, 2018, it held 27.203 million ounces of gold.
• As of December 31, 2017, it held 26.926 million ounces of gold.
• As of September 30, 2017, it held 27.799 million ounces of gold.
• As of September 30, 2016, it held 30.515 million ounces of gold.

There is still hope that many of the world’s emerging markets, which have felt the dollar decline and are suffering from the rising U.S. interest rates, will emerge as buyers of gold. The problem is that many of these countries are suffering badly enough that they may need to raise additional money to deal with their own internal economies.

The long and short of the matter is that central bank activity in gold just hasn’t been enough to stave off the selling pressure that has been seen this year.