Central banks in emerging markets increase gold reserves on growing economic concerns

Posted on : Thu, 30 June 2011

Recent World Gold Council (WGC) data shows that, since 2008, there has been a reversal in the downward trend of central bank gold reserves. The total gold reserves of central banks worldwide fell by 9.6% between 2000 and 2008 but has subsequently increased by 2.2% from 29,870 tonnes in 2008 to 30,535 tonnes at the end of 2010.

This is mainly a result of rising demand for gold from central banks with surplus liquidity in some emerging markets, such as China, India, Russia and oil producing countries in the Middle East region. For example, China’s gold reserves have increased by 167% from 395 tonnes in 2000 to 1,054 tonnes in 2010; and Saudi Arabia’s have increased by 126% to 323 tonnes.

Central banks in emerging markets with surplus liquidity have been purchasing more gold in an effort to diversify their reserve assets away from the leading reserve currencies, such as the US dollar and the Euro.

This trend accelerated following the global financial crisis in 2008 as concerns about the dollar and the euro retaining their value increased. In 2010, gold replaced the Euro as the second largest reserve asset in central banks around the world, after the US dollar. In the aftermath of the financial crisis, worries have persisted about the US budget deficit and the extent of its public debt as well as the Eurozone sovereign debt crisis.

These concerns are unlikely to be resolved in the short term. Therefore, the emerging market central banks are likely to remain net buyers in the near future, according to QNB Capital.

Gold has tended to be regarded as a safe haven by investors, offering protection in times of perceived heightened risk in global markets. Therefore, the global financial crisis encouraged central banks with surplus liquidity to increase their purchases of gold.

The growing demand for gold amongst central banks in emerging markets has contributed to driving gold prices ever higher. The price of gold has risen by 339% from an average of US$279 in 2000 to an average of US$1,225 in 2010. The current record highs could lead to some slowdown in growth of demand for gold, but overall, central banks are likely to continue increasing their reserves, according to QNB Capital.

Gold prices have also been driven higher by demand from private investors and investment banks who are also attracted by the value of gold as a safe haven. This trend has been supported by the growth of investment funds that offer exposure to commodities (physical gold). These funds currently own around 2,000 tonnes of physical gold. Demand for gold for jewellery is also a major driver of prices. It reached over 2,000 tonnes in 2010 alone.