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Central Banks Still Buying Gold

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Central banks bought over 27 tons of gold in July, but big sales by two banks dropped net global purchases to 8.8 tons, according to the latest data by the World Gold Council.

Net purchases of 8.8 tons ranked as the smallest increase in global central bank reserves since December 2018.

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.

The World Gold Council bases its data on information submitted to the International Monetary Fund.

Continuing a trend we’ve seen over the last several months, Turkey was the biggest purchaser of gold, increasing its reserves by another 19.4 tons. That brings its total reserves to roughly 602 tons. Turkey has surpassed Russia as the world’s top gold buyer. According to a recent report by AlJeezera, Turkey will also see record gold production this year and the central bank is expected to buy all 44 tons. Turkey has wrestled with inflation in recent months. The Turkish lira has fallen 20% this year and has dropped to all-time lows. Analysts told CNBC  that rapidly shrinking foreign reserves, inflation and currency devaluation are showing no signs of abating. The Turkish central bank is frantically trying to backstop its currency. Meanwhile, Turkey is selling dollars. According to Bloomberg,  state banks sold roughly $1.1 billion of foreign currency in just two days in May.

Qatar added 3.1 tons of gold to its reserves in July following on the heels of a 3.1-ton purchase in June.

Last month, there were reports that the board of the Reserve Bank of India (RBI) was considering significantly raising its gold reserves. As of June, India had added 22.7 tons of gold to its reserves. The RBI continued its buying in July, adding 2.8 tons of gold to its reserves.

After selling gold three straight months, Kazakhstan became a buyer again in June, adding 5.8 tons of metal to its reserves. It bought another 1.9 tons in July.

Gross central bank gold sales totaled 17.7 tons in July, the highest level since July 2019. Uzbekistan (-11.6 tons) and Mongolia (-6.1 tons) accounted for 95% of those sales. Germany and Russia also shrank their gold reserves by half a ton each.

Earlier this year, Russia announced it would halt gold purchases effective April 1. Through July, it had held to that commitment. There was immediate pressure on the bank to resume purchases. 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.

For the 10th straight month, the People’s Bank of China did not report any gold purchases.  It’s not uncommon for China to go silent and then suddenly announce a large increase in reserves.

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.

On the year, central bank gold-buying has fallen slightly below the average pace since 2010. A senior analyst for commodities at HDFC Securities called it a “temporary pause.”  He said this isn’t surprising given the economic slowdown and we could even see some selling as countries try to cope with coronavirus. “The major central banks from the world have bought record gold in the year of 2019, which was the highest in 50 years. The exhausted limit of gold buying from most of the central banks has resulted in a slowdown in H1 2020,” he added.

The World Gold Council 2020 Central Bank Survey found that 20% of central banks globally plan to expand their gold holdings in 2020.

Factors related to the economic environment – such as negative interest rates – were overwhelming drivers of these planned purchases. This was supported by gold’s role as a safe haven in times of crisis, as well as its lack of default risk.”

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