Central Banks Boost Gold Reserves As Low Interest Rates Bite

Nations are ditching currencies to buy gold again, raising stocks by 10% since financial crisis as metal becomes a safe haven.  Central banks have boosted their gold stocks by almost 10% since the financial crash, reflecting its renewed attractiveness as a safe haven in an environment of uncertainty and low or negative interest rates.

China and Russia have led the switch to gold away from foreign currencies, especially the US dollar, to shore up their reserves. Western nations, including the UK, have halted several decades of mass sell-offs.

According to the Official Monetary and Financial Institutions Forum (OMFIF), central banks have swooped on the gold markets every year since 2008 to become net bullion buyers, adding more than 2,800 tonnes, or 9.4%, to reserves.

“Developed countries [accounting for the lion’s share of total official holdings] have been conserving stocks, while developing countries led by China and Russia have been building them up.

“This is the longest protracted spell of gold accruals since 1950-65, when central banks and treasuries acquired a net total of more than 7,000 tonnes during the economic recovery after the second world war,” said David Marsh, the director of OMFIF.

He said central banks were turning back to gold purchases in line with a century of practice between 1870 and 1970. “This has restored the yellow metal as a central element of monetary management.”

According to the World Gold Council there was a 15% jump in demand in the second quarter of the year as purchases by exchange-traded funds added to central bank purchases.

“In fact, the gold price posted the strongest first half-yearly performance, up 25%, for more than 35 years,” it said.

The OMFIF report found that central bank purchases over the past eight years have returned to the 100-year average up to 1970 when annual net gold purchases were 350 tonnes a year.

Marsh said gold had gone through seven stages since the early 19th century. A period of selling by central banks from the late 1990s juddered to a halt in 2008, but not before the UK, the Netherlands and Switzerland had unloaded billions of pounds worth of the metal.

Between July 1999 and March 2002, the Bank of England sold 395 tonnes of gold at an average price of $275.60 per troy ounce. It is estimated the UK lost about £4bn after the price recovered to approximately $1,000 an ounce. Since 2008 it has been worth between $1,000 and $1,600.

The sales were widely criticised at the time.

The report said: “Central bank gold transactions have often been somewhat disassociated from the gold price.”

Central banks were net sellers during four decades of fluctuating but generally rising bullion prices from the early 1970s onwards.

“The latest period since 2008 has been a time of sharp price swings in the $1,000 to $1,600 per ounce range, but the eight-year switch to central bank purchases appears to have been a factor behind the price recovery since 2015,” the report said.

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