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Central Bank Gold-Buying Expected to Ramp Up Next Year

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Central bank gold-buying is expected to ramp up again in 2021 with Russia and China possibly entering back into the market.

Citigroup and HSBC Securities both expect an increase in central bank gold purchases next year after a drop-off in 2020.

Bloomberg reported that according to Citi, Russia could return to the market next spring and China’s central bank may resume adding to reserves after the presidential election.

After record years in 2018 and 2019, central bank gold-buying has slowed this year – although it remains strong. Through the first half of 2020, central bank net purchases of gold totaled about 233 tons. That was 39% lower year-on-year. The lower rate of purchases in 2020 was expected given the strength of central bank buying both in 2018 and 2019. The economic chaos caused by the coronavirus pandemic has also impacted the market.

Central bank demand came in at 650.3 tons last year. That was the second-highest level of annual purchases for 50 years, just slightly below the 2018 net purchases of 656.2 tons. According to the WGC, 2018 marked the highest level of annual net central bank gold purchases since the suspension of dollar convertibility into gold in 1971, and the second-highest annual total on record.

“Net central bank purchases have slowed down but are still positive, so there is no risk that central banks become a source of downward pressure on prices like they were in the 90s,” Bernard Dahdah, senior commodities analyst at Natixis SA, told Bloomberg.

The entry of Russia and China back into the market would significantly up central bank demand.

Earlier this year, Russia announced it would halt gold purchases effective April 1. Through July, it had held to that commitment. In early April, Russian banks asked the Central Bank of Russia to resume buying gold for its reserves as gold exports were hobbled by the coronavirus pandemic. In a letter released on April 29, the Russian central bank said it did not see any need to resume buying gold at the time, but added it would continue to monitor the situation in both the global gold market and the banking sector.

Meanwhile, the People’s Bank of China has not reported any gold purchases in 10 months. It’s not uncommon for China to go silent and then suddenly announce a large increase in reserves. The Chinese government has hinted that it might shed more US Treasuries from its reserve holdings. It would come as no shock if the Chinese replaced US debt with gold.

Many analysts believe China holds far more gold than it officially reveals. As Jim Rickards pointed out on Mises Daily back in 2015, many people speculate that China keeps several thousand tons of gold “off the books” in a separate entity called the State Administration for Foreign Exchange (SAFE). Given the political dynamics and the ongoing trade war, it seems unlikely the Chinese suddenly stopped increasing their gold reserves in 2016.

Analysts believe central bank gold demand will remain strong in the longterm as countries seek to untangle themselves from overdependence on the US dollar.

“The broader push to buy gold is clear amid a longer-term de-dollarization trend and a bias toward reserve diversification,” Aakash Doshi, head of commodities for North America at Citi Research, told Bloomberg.

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