At the end of 2009 the gold price was recorded at $1,095.7 per ounce. It has since risen to around $1,480 per ounce, which is an impressive rise of 35%. The increase in the price is explained by a range of factors including the weakness of the Dollar, concerns about rising global inflation, a rising oil price and tensions in North Africa/Middle East as well as increased jewellery (+17%y/y) and technology (+12%y/y) demand. Investment demand reportedly fell slightly by around 2%y/y in 2010. On the opposite side of the equation, gold supply (mine production) increased by 9%y/y in 2010.
But what happened to demand for gold from central banks? A report released by the World Gold Council last week, argues that there has been a ‘paradigm shift in the official sector’ and that central banks have become net buyers of gold, after selling gold each year for 21 years. Unfortunately, this seems to overstate the situation.
During 2010, the gold holding of central banks within advanced economies was slightly lower at 699.97 million ounces (or 21 772 metric tons), down from 700.19 million ounces (21 778 metric tons) at the end of 2009. A breakdown of the data by country shows that the official gold holdings for Australia, Canada, Japan, UK, USA, and Switzerland all remained unchanged in 2010, while the European Central Bank reduced its holdings fractionally.
The gold holdings of central banks in the emerging and developing economies rose fractionally during 2010 and by the end of the year totaled 181.21 million ounces (5 636 metric tons) versus 175.42 million ounces (5 456 metric tons) at the end of 2009. Once again most central banks kept their holding unchanged including India (after rising sharply in 2008), Saudi Arabia, China, Poland, Lebanon, Indonesia, Malaysia, Romania, Turkey, Algeria, South Africa, Egypt, Kuwait, Argentina, Brazil and Peru. The key exception was Russia, which increased its holdings from 20.87 million ounces (649 metric tons) to 25.36 million ounces (789 metric tons). This increase accounted for almost the entire increase in central bank gold holdings in 2010.
Stated differently, gold holdings by the top 20 central banks, account for more than 90% of all central bank gold holdings. Out of these 20 central banks, only two have increased their gold holdings in the past year, namely Russia (up 140 metric tons) and Venezuela (up 5 metric tons). The South African Reserve Bank ranks 26th in the world in terms of gold holdings.
The changes in gold holdings during 2010, as outlined above, are not really sufficient to represent a ‘paradigm shift’ in the official sector’s view on gold.
Download the presentation slides