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In my previous posts here and here, I recommended buying gold. On that occasion, I explained that one main reason for expecting a long term rise in the price of gold is the behavior of the central banks. Ever since 2010 the central banks have become net buyers of gold after many years of only net selling. On November 15, 2012, the World Gold Council published its report, Gold Demand Trends Q3 2012, where it was clearly expressed that this trend is continuing. According to the report:

Diversification of reserve assets remains the driving force behind gold demand by central banks and purchases of a similar order of magnitude are expected for the fourth quarter. Official sector demand is likely to act as a fairly solid pillar of demand going forward.


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Source: World Gold Council Chart: Arie Goren


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2012*: 3 quarters purchases annualized Source: World Gold Council Chart: Arie Goren

According to World Gold Council, in the third quarter of 2012, central banks continued to purchase gold but at a slower pace. central banks net demand in the quarter was 97.6 tonnes (3.14 million ounces) worth $5.2 billion, accounted for 9.0% of overall gold demand during the period. The Brazilian central bank bought 1.7 tonnes (54,656 ounces) of gold during the quarter, increasing its reserves to around 35.3 tonnes (1.13 million ounces). The last time Brazilian central bank reported an addition to its gold reserves was in June 2005. The central bank of Paraguay bought 7.5 tonnes (241,131 ounces) during the quarter, and the central bank of South Korea bought 16.0 tonnes (514,412 ounces) increasing its reserves to 70.4 tonnes (2.26 million ounces).

The central banks of the following countries are showing increasing gold purchase this year: South Korea, The Philippines, Kazakhstan. Russia, Mexico, Turkey, Argentina, Ukraine, along with several others. The central banks are buying gold to reduce their reliance on the US dollar as a reserve asset. The purchases made by the central banks of developing countries have been increasing in recent years, as those nations diversify holdings, partly because of rising foreign-exchange reserves through export-led growth, but also, more recently, as a reaction to the sovereign-debt crises affecting traditional reserve currencies, like the U.S. dollar. The fact that so many central banks are increasing their gold holdings shows that they believe that considering its actual price, gold is a good investment, which will preserve its value. central banks are aware of the fact that demand for gold will remain strong. They also realize that because un-mined known gold reserves are only 51,000 metric tonnes, when the global annual gold demand is about 4,500 tonnes, discovering and developing new reserves will turn out more costly.


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Source: World Gold Council Chart: Arie Goren

The total demand for gold in the third quarter of 2012 was 1,084.6 tonnes (34.87 million ounces), worth $57.6 billion. Demand was up 10% from the previous quarter, but was 11% down from the same quarter of 2011. The demand for gold for jewellery rose to 448.3 tonnes (14.41 million ounces) from 416.9 tonnes in the second quarter, and the demand for investments, bar, coin, medal and ETF, rose to 429.9 tonnes (13.82 million ounces) from 294.2 tonnes in the second quarter.

Gold Demand First Three Quarters of 2012


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Source: World Gold Council Chart: Arie Goren

Summary

In my opinion, central banks increasing purchasing trend is a long term trend and will drive gold prices higher. Since central banks were responsible for 12% of the total global gold demand in the first three quarters of 2012 and are continuing their gold purchases, there is a high probability that gold price will rise during the next quarters, and that will give investors an opportunity to join the trend and make nice profits.

ETFS for gold traded on NYSEArca:

  • SPDR Gold Shares (NYSEARCA:GLD)
  • Sprott Physical Gold Trust ETV (NYSEARCA:PHYS)
  • ETFS Physical Swiss Gold Shares (NYSEARCA:SGOL)
  • ETFS Physical Asian Gold Shares (NYSEARCA:AGOL)
  • iShares Gold Trust (NYSEARCA:IAU)
  • PowerShares DB Gold (NYSEARCA:DGL)
Source: Central Banks Are Still Gold Buyers