Central Banks turn buyers from sellers

Since last year central banks have been net buyers of gold. More importantly they have stopped selling gold.

We do not deem the I.M.F. sales of gold as central bank selling, even if it is within the totals given under that agreement. It is not done in the spirit of the Central Bank Gold Agreement. Their purpose is to raise funds for a specific purpose, whereas the central bank sellers wanted to diversify their foreign exchange reserves out of gold. In addition they were sellers in support of the establishment of the € internationally.

It is a matter of record that both China and Russia are now buyers of gold. We are of the belief that China is buying all its local production and using agencies to buy more on the open market for six or more years now.

For almost the same length of time Russia has been saying they were going to be buyers. Their stated aim is to have 10% of their reserves in gold. With the slow buying of gold until last year they must have thought the gold price would rise to make their gold reserves equal that? But, in the last year they have put their money where their mouth is and are buying on the open market too. They have also bought local gold and we believe they will move to the point that they are buying all their local gold production all the time, if they are not there already. We have the news on record that Russia is a persistent buyer, having bought 15.5 tonnes last month taking the last year's purchases up to 135 tonnes.

How are they buying?

It is evident that the policies of both central banks are similar. Both are buying gold as it is available. This can be done by placing an order at maximum price of say $1,170 and asking for offers. They don't move the price unless they are convinced they will attract buyers and feel that the price won't drop in the short-term. If the price falls it is because there is an amount for sale that is yet to be bought. As it falls past the limit given by the central bank, the dealer offers it to the bank, which has the capacity to buy very large amounts easily and quickly.

Dependent on the volume on offer, the central bank buys, but only at their offer price or below. This leads to a central bank such as Russia's buying 3.5 tonnes one month and 15.5tonnes the next month. The important factor is that they are persistent buyers at a price taking all they can get at that price. If this continues it underpins the gold price itself. Other parts of the gold price will have to pay up, or stay away. This leads us to believe that shortly the gold price will move up as such a policy does create a shortage in other parts of the gold market, which has to be met.

The Implications

With central banks now buyers, the significance of gold as a reserve asset has been heightened, considerably. Other investment buyers see this they realize that it is dramatic support for the gold price, far outweighing smaller factors in the market place.

Additionally such demand is long-term investment demand, which will underpin the market for as long as sovereign debt issues undermine the current monetary system. The shift in the economic balance of power will contribute far more than these worries to the monetary system and further enhance the investment attractions of gold.

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For Private Consultations with Julian D.W. Phillips directly please, contact him on gold-authenticmoney@iafrica.com.