Central Bank Gold Buying Back On Track

Summary

• The Russian central bank has announced an 18.7 tonne increase in its gold reserves in June after only expanding them by 3 tonnes in May.
• This follows on from China announcing a 15 tonne rise in its central bank gold reserve in June following a zero increase in May.
• Overall rises in central bank gold holdings for the full year look like coming in at around 300-350 tonnes, down from over 560 tonnes in 2015.

Central Bank gold buying has been put forward as one of the key gold demand elements in the metal's supply/demand fundamentals. In reality, though, for the past couple of years or so there have only been two central bank gold buyers of any real significance - Russia and China - which between them had been announcing month-on-month purchases equivalent to around 400 tonnes a year, ever since China started announcing its monthly gold holding increases from the middle of 2015. There have been some other buyers, which have reported sporadic rises, or falls, in their reserves, while the only other regular gold buyer has been Kazakhstan, taking in about 2.5-3 tonnes a month which amounts to approximately the monthly production from its own gold mining industry.

So when in May Russian gold buying fell to a paltry 3 tonnes and China announced a zero increase in its reserves, analysts wondered whether this signified an almost total cutback from the world's principal central bank gold buyers, which would throw their supply/demand projections for the year into total disarray.

However, in June things seem to be getting back on track with respect to Chinese and Russian gold buying. First China announced a return to increasing its gold reserves by 15 tonnes that month - see: Chinese Central Bank Gold Buying Is Back - and now the Russian central bank has announced a good increase in its gold reserves too, also for June. Analysts may still have to reduce their overall central bank buying forecasts for the year, though - particularly as Venezuela has been having to sell a significant proportion of its gold to meet its international debt commitments. (So far this year it has reported sales of around 67 tonnes.) At this stage of the year we would estimate net central bank gold buying for the year at perhaps only 300-350 tonnes, somewhat below previous analyst forecasts of perhaps 490 tonnes. By comparison, gold consultancy Metals Focus, which provides the World Gold Council with its supply/demand statistics, estimated 2015 central bank gold purchases at 566 tonnes.

After only increasing its gold reserves by a paltry 3 tonnes in May, giving rise to some doubts as to whether its recent high gold purchase levels would be continuing, the Russian central bank has thus allayed some of those fears with its announcement yesterday of a 600,000 troy ounce (18.7 tonnes) rise in its gold holdings in June. This brings its year to date announced gold purchases to around 84 tonnes for the half year with a total of 1,499 tonnes held - maintaining its 6th place amongst the world's national holders of gold.

So, both Russia and China are increasing their central bank gold holdings - believed to be in part to diversify an important proportion of their foreign reserves away from the US dollar, but also as both nations see an increased role for gold in any future realignment of the global financial system. This may not be a universally shared opinion, but it may also account for the large amounts of gold retained in the central banking system - particularly by some of the world's largest economies. Notably this applies to the USA, which according to the IMF, holds some 75% of its forex reserves in gold and Germany which holds around 69%. By contrast China only holds a reported 2% of its forex reserves in gold, although there is a strong belief that its gold holdings position is substantially understated through holding gold in non-reported accounts and in the state-controlled commercial banking system.

Nevertheless, even if some of the wildest estimates of the true Chinese gold holdings are correct (unlikely), the overall percentage of its forex reserves held in gold would still be tiny in relation to the percentage holdings by many of the most financially dominant Western nations. Russia comes slightly higher up the list in terms of the percentage of its forex holdings in gold - around 15% - but that is still at a much lower level than that for the major Western economies. Hence the perceived need for both countries to continue building their gold reserves at a reasonable rate.

We would thus anticipate both China and Russia continuing to increase their gold reserves at a combined monthly rate of perhaps between 30-40 tonnes a month through the remainder of the year. Apart from Kazakhstan we don't see any other regular central bank buying emerging.

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