The World Gold Council (WGC) publishes quarterly data about trends in gold demand around the world, from industry to investment to mining and new technologies. In February, the research group released its 2016 report on central bank gold demand. As central banks have consistently been net buyers of the yellow metal over the past five years or so, this is always a key area of interest for understanding the international gold market.
The way that the world’s central banks, on balance, treated or viewed their gold reserves underwent a dramatic sea change in late 2010. This is shown for some perspective in the graphic below.
Prior to 2010, the last time central banks were net buyers of gold was 1988. After over two decades of largely shedding gold from their reserves in order to divert that capital elsewhere, several central banks began increasing their gold holdings at an unprecedented pace.
Back in the 1990s, by comparison, central banks were clearly net sellers of gold. This was led by the Bank of England, which rather infamously dumped millions upon millions of troy ounces of its gold reserves onto the global markets over a period of several years.
The 2016 data from WGC show that this same trend of net purchasing remains in place, albeit at a slower pace than in years previous. Central banks added a (net) total of 386 metric tonnes (386,000 kilos or 12.4 million troy oz) of gold last year. The number was down about a third from the previous year and was the first year in which the annual total was less than 400 tonnes since 2010. The five-year running average is a healthy 600 tonnes.
Keep in mind that the net number can be affected by greater central bank gold sales, not just the absence of purchases. This year, Venezuela was one notable seller of gold, as it attempted to stem the tide of rapid inflation and a plummeting currency. Canada is another country that has liquidated its gold reserves in recent years.
The same factors, in some sense, contributed to the relative slowdown of buying by China: the country’s central bank didn’t sell gold, but bought less of it, in order to adjust to the decrease in value of its currency reserves (and the considerable amount of U.S. Treasurys it sold). Management of foreign reserves, the WGC report shows, is one piece of central bank business where gold plays a quiet but important role.
The leading buyers among central banks included the usual suspects: Russia, China, and Kazakhstan. These three countries’ central banks accounted for roughly four-fifths of the entire year’s net purchases of gold by their peers around the world. Russia alone has grown its gold reserves by a fantastic amount over the last decade, more than doubling to over 1,000 tonnes.
This latest data from the WGC shows that the trend of central bank gold-buying is persistent yet nonetheless slowing. Higher prices for the precious metals in 2016 may have deterred some official purchases, so it remains to be seen whether or not this will have an impact again in 2017.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.