Central Banks Can't Get Enough Gold

05/30/2012 10:00 am EST

Focus: COMMODITIES

While gold is settling in closer to its recent bottom than it is to its top, gold demand is growing among central banks...and that means demand is likely to increase across the board in coming months, notes Lawrence Williams in The Gold Report.

The latest official central-bank gold holding figures from the IMF confirm that central banks around the world are continuing to buy gold—some in pretty large quantities.

This should be yet another stabilizing factor for the gold price, and if the trend continues, it suggests that the central banks will buy even more this year than last—and that's only the ones which let the world know exactly what their gold reserves are!

The latest figures not only show some substantial gold buying in April, but also a big lift in gold purchases by the Philippines that actually date back to March, but were slow in being notified to the IMF. The Philippines' March gold purchases amounted to no less than 1.033 million ounces—32 tonnes—of the yellow metal, the biggest volume since Mexico bought around 78 tonnes a little over a year ago, and increased the country's gold reserves by almost 20%.

The Philippines was not the only laggard in reporting increased gold reserves though. Tiny Sri Lanka raised its reserves by an even greater 39%, but dating back to January, with a rise of 2.177 tonnes to 7.807 tonnes—obviously far less significant in the global picture, but yet another indication of the perceived significance of gold in particular in the Asian economies.

The most significant reported gold purchases in April itself included 29.7 tonnes by Turkey (a 14% increase in its reserves, but this is thought to have largely been due to its policy of acceptance of gold as collateral from commercial banks), 2.92 tonnes by Mexico, 2.02 tonnes by Kazakhstan, and 1.4 tonnes by the Ukraine.

The continued buying by central banks does continue to indicate an underlying unease about the sovereign debt situation and its impact on the value of some key reserve currencies—not least the dollar and the euro.

In an e-mail to Mineweb, respected New York gold analyst Jeff Nichols commented: "The lastest IMF data on central bank gold reserves was just released earlier today—showing gold purchases by Mexico, Kazakhstan, Ukraine, Russia and the Philippines. Undoubtedly, China and perhaps a few other countries bought gold but did not report their purchases to the IMF."

This reiterates the widespread belief that some countries—of which China is thought to be the major entity—for political reasons do not report their total holdings to the IMF, but hold new gold purchases in accounts that are not reported until it is considered politically expedient to do so.

The last time China reported an increase in reserves was in 2009. Since then, there has been much speculation that China could be building up its reserves at a rate of 400 or 500 tonnes a year, or more, given the level of domestic gold production and the big surge in imports seen.

Although China is the world's sixth-largest holder of gold, the metal only represents a tiny 1.8% of its reserves. There have also been a number of presumably government approved (is there anything else in China?) statements by officials that do suggest the nation is carefully buying on dips in the gold price so as not to create disruption in a relatively orderly global gold market.

Overall, reported central-bank gold purchases last year amounted to over 450 tonnes, the highest for nearly 50 years, and The World Gold Council and GFMS have suggested that this year will see another 400 tonnes or more flowing into central-bank coffers. The purchases to date suggest that this target may well be achieved.

Gold may have fallen out of central-bank favor for a few decades, but the realization now is increasingly that it should be a significant part of a country's foreign-reserve base, as fiat currencies the world over lose their intrinsic value.

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