Given events over the last few years, I thought it could be useful to chart IMF data on official central bank gold transactions to try to discover possible trends. All data are through October 2011.
(Click charts to expand)
Now the interesting thing is that the spikes are shrinking. However, we must bear in mind the facts: 1) China’s announcement reflected several years of buying. 2) Saudi Arabia’s jump reflects an “accounting change.”
If we look at the totals using a bar chart, it’s clearer that central banks have announced (not necessarily purchased) smaller amounts of gold being bought each year after becoming net buyers in 2009.
The above graphs could indicate that either 1) central banks as a group preferred to buy less gold in 2011 than in 2009 and 2010 (while becoming more interested in gold than at any time in the recent past), 2) gold is becoming less available to buy right now, or 3) central banks are hiding even more of their purchases from the public.
The above chart is merely a more recent time frame – what's important here is that the gold sales by central banks are essentially 0! Compared with the longer-term graph, it is clear that central banks are not major sellers of gold anymore and are afraid to sell.
Now, if we start to make assumptions, we can see what sort of impact these central banks have on the gold price. Assumption 1: Countries, which started buying gold in 2008 continue to buy. Assumption 2: IMF data accurately reflect central bank SALES of gold (there may be large hidden buys that countries will not reveal, but not much in the way of sales – unless, of course, Western governments are surreptitiously selling). Given these assumptions, we know that the sales are not coming from central banks – which means the central banks by default must be buying from the market.
That, of course, could explain part of the gold price run-up. So far, gold has been a great investment – and if the central banks are really running out of new sources of gold, which appears to be the case, gold should continue to outperform despite the recent turmoil. If our previous assumptions were wrong, however, we can become even more bullish on the future of gold because that would mean there are more potential buyers and there is less gold available. In short, keep stacking gold coins! I remain long gold and silver.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.