Tuesday, August 25, 2009

Central Banks Become Net Buyers Of Gold For First Time Since 1987

Last week I posted commentary suggesting that the European Central Banks were, for the most part, done dumping their gold reserves - either they have mostly run out of gold or have decided to keep what they have left.  At the time, I was unaware that France had also made a statement that they were done selling their gold.

Last month GFMS, the organization that monitors global supply and demand of gold - albeit not accurately (i.e. they tend to vastly understate demand and do not account for declining gold mining output, which is now a monthly occurrence) reported that global Central Banks became net buyers of gold. Here is a link to an article referencing the GFMS report:   Central Banks Are Now Net Buyers of Gold

Russia announced last week that they had increased their Central Bank gold reserves by 600,000 ounces.  Here is a chart I borrowed from  Ed Steer's Gold & Silver Daily

We also know that China has been actively increasing their gold reserves, which are still miniscule compared to their total currency reserves.  In numerical terms, China's gold holdings are roughly 2% of its $2 trillion in currency reserves.  Globally, Central Banks hold an average of 10% of their currency reserves in gold.  If their currency reserves stayed at $2 trillion, and with gold at $950/oz.,  China would have to accumulate over 5000 tons of gold to bring its gold holdings up to just the global Central Bank average.  Please note that annual global mining output of gold is 2300 tons and declining rapidly.  Anyone see a massive demand/supply imbalance here?

This development among the Central Banks is quite significant, because for the last 12 or so years, the gold market has been functioning under a roughly 1000 ton supply deficit.  And with demand growing and mining output declining, this deficit is growing.  Up until this year, Central Banks had been selling their gold reserves in order to bridge the supply/demand gap.   Assuming the trend of CB accumulation continues, this can only mean one outcome for the direction of the price of gold.  I'll leave that to your judgement to decide.

When I first became interested in the precious metals and mining stock sector back in late 2001, I followed Jim Dines' subscription newsletter as part of my education process.  Back then he called for a bull market of unprecedented proportions in gold, silver and mining stocks based on
  1. There would be a global race by countries to devalue their fiat currencies
  2. Central Banks would shift from being net sellers to net buyers of gold
  3. Mining stocks would embark on a bull market move that would make the internet stock bubble look tame
Well, now two out of three of Dines' propositions have occurred.  It's only a matter of time until the third one is realized.


  1. Great information!

    I find it very informative that even in the face of lower oil prices and a tired economy in Russia, they find it important to add gold at this time using what cash they have. Linked back to this story.

  2. Russia is either the 4th or 5th largest holder of U.S. Treasury bonds. They are accumulating gold rapidly to hedge their U.S. dollar exposure. In fact, in a widely publicized statement made about 3 or 4 months ago, the head of the Russian Central Bank said that he was under orders from the Kremlin to take gold up 10% of Russia's currency reserves.