According to the latest IMF statistics at least 12 countries are known to have increased their gold reserves in March indicating the continuation of a trend now going back more than two years, and one which has been on its own a substantial supporter of the higher gold prices seen over the period. Overall Central Banks appear to have purchased no less than 58 tonnes in the month, which could suggest an acceleration in their increases in holdings if buying at this rate continues throughout the year.
While the majority of these countries only raised their reserves by a very small amount, there were indeed some quite significant purchases - notably from Mexico, which increased its holdings by 16.81 tonnes to a total of 122.58 tonnes; Russia with purchases of 16.55 tonnes giving it total reserves now of 895.75 tonnes; Turkey with 11.48 tonnes taking it to 209.6 tonnes in its reserves. Argentina bought 7 tonnes taking its holdings to 61.74 tonnes, Kazakhstan with 4.3 tonnes - up to 96.16 tonnes and Ukraine with 1.18 tonnes bringing its holding to 29.21 tonnes. A further half dozen countries raised their holdings by increments of less than a tonne.
This, of course, only shows the figures for those nations which are, one assumes, wholly transparent in reporting their gold holdings. There have been some quite sharp ‘upwards adjustments' in the past from some countries which have been less open in their reporting - notably China which is assumed by most observers to be building its gold reserves strongly over the three years since it last announced an upgrade in its holdings.
The continuing upwards trend in Central Bank purchasing is yet another indicator of unease in the sector about the prospects for those currencies - notably the dollar, the euro, the pound sterling and the Japanese yen - which provide the bulk of their monetary reserves. Gold is seen as probably a much less risky investment in the current environment. It is perhaps time that those gold doubters took note!
Last year Central Banks that do report their statistics were seen to have bought 439.7 tonnes of gold and many gold analysts are predicting similar levels of purchases in 2012. If the March IMF statistics are anything to go by this figure could even prove conservative, although admittedly Central Bank purchases in January and February were very small by comparison with the March figures.
Purpose of Holding Gold
Most central banks hold their nation’s gold in the vaults of the world’s leading financial centers’ central bank vaults. These include New York, London, and Canada among others. In a peaceful, cooperative world, this is sensible as one of the prime purposes of central banks holding gold is to cover the nation’s international trade payments when their own currency becomes unacceptable and their reserves of foreign exchange are depleted. By positioning the gold outside the country, it’s instantly accessible for payments or guarantees of payments.
Dangers of a Nation Holding Gold in Another Nation’s Central Bank
In the last week we have heard the announcement that Iran has (according to them) 907 tonnes of gold. The developed world has just outlawed Iran dealing in gold and silver (there are other places, where if they wished to do so they will be able to trade). With their gold inside Iran, it is outside the reach of the developed world though. If they had held their gold in the world’s main, developed world vaults that would have been frozen along with Iran’s other overseas assets. We may not agree to Iran’s politics and attitudes, but there is a lesson to be learned here.
Ownership implies the freedom to do what you want with an asset. In this case we are talking about a nation’s assets. The handling of Iran’s assets by freezing of their assets shows that other nations can interfere with that freedom. Governments feel free to impose restraints on other people’s assets within their jurisdiction. It is this concept of a right to restrain the rights of ownership that will prove a growing issue.
With the world changing from an under-developed world with a developed world to an emerging world drawing down power and wealth from the developed world, there are many changes taking place which will lower the levels of international cooperation in the days ahead as political, religious, monetary and economic pressures rise.
One nation that has foreseen these pressures coming is Venezuela. Their 160 tonnes of gold was held in Canada, the U.S. and European vaults and out of their full control. Their policies –including the nationalization of gold mining and export—have proved unpopular in the developed world too. With Venezuela being an oil exporter primarily, the unpopular President (outside the nation) felt it prudent to ship his nation’s gold back home. The process began a few months ago.
Venezuela’s Gold Comes Home
Venezuela has now succeeded in bringing its 160 tonnes of gold from the developed world’s central bank vaults (i.e. Canada, U.S. and Europe). There’s no doubt that such a move does secure the nation’s monetary sovereignty. Now, Venezuela’s gold cannot be subject to the political wishes of the U.S., Canadian or European governments.
Furthermore, there’s a potential 3,000 tonnes of gold under the ground in Venezuela and the likelihood that the government will take that into their vaults over the time it takes to mine it. They will then be in a position to take the U.S. dollars they receive for their oil and pay their miners for the gold, so diversifying their reserves away from currencies and into gold. If they do that, then this is one more source of supply that will be removed from the gold market.
Whatever the nation’s politics, it is a central banker’s duty to do all in its power to protect its nation’s gold and foreign exchange reserves in terms of control and value. With dollar hegemony, a great deal of that power remains in the hands of the issuer of that currency. As sovereignty issues grow, it is becoming incumbent on central bankers to do more to protect nation’s reserves. The most vulnerable nations are those whose politics differ drastically from the developed world or those whose international trading is not dependent on the major developed world. After all, if you are a kind of economic colony of a major nation it will exercise its influence far more effectively through other routes.
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The People’s Bank of China (PBoC) continues to strengthen its hold of the local gold market, banning the establishment of gold trading platforms and channeling everything through the Shanghai exchanges, according to an official notice released Tuesday. At the same time, a senior PBoC official urged his peers to favor further gold buying saying “no asset is safe now, the only choice to hedge risks is to hold hard currency – gold.”
Gold investors in the U.S. may still doubt whether fundamentals are in place for the yellow metal to continue its decade-long rally; Chinese authorities definitely aren’t. On Tuesday, the PBoC decided to ban local regions, institutions, and individuals from setting up gold exchanges, while prohibiting other exchanges from establishing any gold trading platforms.
“Since 2001, […] China’s gold market has developed very rapidly, formed [by] a combination of cash and derivatives, institutions and individuals [through] a multi-level structure,” read the release. At the same time, illegal means of investing in gold have sprung across China, from exchanges to gold trading platforms, according to the PBoC.
Thus, all gold trading will be channeled through the Shanghai Gold Exchange and the Shanghai Futures Exchange. The measures are designed to “safeguard economic and financial security and social stability,” given that gold “is an important component of [the PBoC’s] international reserves.”
Chinese gold demand, both retail and financial, has surged as of late. China’s gold consumption doubled to about 20% of global supply in the last decade, while its reserves have climbed to 1,054 tons, or about 1.8% of its foreign exchange reserves.
Senior officials at the PBoC have been pushing to increase the country’s official gold holdings. Zhang Jianhua has been among the most outspoken. On Tuesday, head of the PBoC’s research bureau, said:
The Chinese government should not only be cautious of the imported risk caused by rising global inflation, but also further optimize its foreign-exchange portfolio and purchase gold assets when the gold price shows a favorable fluctuation.
No asset is safe now. The only choice to hedge risks is to hold hard currency – gold.
Interest in Chinese gold has drawn some heavy hitters. Billionaire George Soros and Alibaba Chairman (and Yahoo’s partner) Jack Ma have placed their bets on Chinese retail demand for gold via the IPO of jeweler Chow Tai Fook. Interest for gold in general has exploded over the last decade, with physically-backed ETF GLD becoming the second largest ETF by assets.
Gold prices have taken a big hit of late, though. The yellow metal is down more than 16% from its August highs, while gold mining stocks like Goldcorp, Newmont, and Barrick Gold have been mixed.
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Cross Currency Rates
Gold is marginally higher in most currencies and is headed for its biggest weekly advance in six weeks after also seeing a gain of 1.8% in November. Gold’s technical picture has become positive again and is now aligned with the very positive fundamental backdrop.
The Bank of Korea’s continued diversification of its foreign exchange reserves is a bullish factor which may have led to the price gains today.
The central bank of South Korea announced that it had purchased 15 metric tonnes of gold in November to raise its reserve of bullion in an effort to diversify its portfolio of its foreign reserve investment and reduce risks caused by market volatilities.
According to the Bank of Korea (BOK), it made a purchase of 15 tons of gold last month to increase the nation’s gold reserves to 54.4 tons worth $2.17 billion as of the end of November.
It boosted the size of its gold reserves by US$850mn in November, up a massive 39% from the previous month. Its total gold reserves are now worth US$2.17bn.
The purchase was the central bank’s second acquisition of gold this year. It bought 25 tons of bullion in June and July for the first time in 13 years.
Thanks to the buying, the gold reserves of Asia’s fourth-largest economy jumped by three notches to 43rd in the rankings of the World Gold Council.
Based on the October reading, Korea is the eighth-largest holder of foreign exchange the world behind China, Japan, Russia, Taiwan, Brazil, Switzerland and India.
The Bank of Korea said its gold holdings account for just 1% of its foreign-exchange reserves.
“The BOK purchased gold last month in a bid to diversify its portfolio of foreign exchange reserves,” Lee Jung, head of the investment strategy team at the BOK’s Reserve Management Group, told reporters.
"Demand for gold is increasing as a hedge against global inflation amid the persistent sovereign-debt crisis in Europe," Lee was quoted as saying.
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Gold futures rose to a record $1,631.20 an ounce as the impasse on the U.S. debt ceiling boosted demand for the precious metal as a haven.
The cost of insuring U.S. debt rose to a 17-month high, and the dollar fell to a record against the Swiss franc as congressional leaders offered competing budget plans. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have said they will cut the U.S.’s top-level credit rating should a failure to raise the debt ceiling lead to a default.
“Government securities, the traditional area of safety, are now at risk, so that’s why you’re seeing gold grind higher,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “The level of U.S. government borrowing has caused the erosion of the dollar and adds more fuel to the metal’s rally.”
Gold futures for December delivery rose $8.90, or 0.5 percent, to $1,628 at 10:33 a.m. on the Comex in New York. In July, the price has climbed 8.3 percent, heading for the biggest gain since November 2009.
Holdings of gold in exchange-traded products rose 0.3 percent to a record 2,128.229 metric tons yesterday, data compiled by Bloomberg show.
Silver futures for September delivery rose 57.7 cents, or 1.4 percent, to $41.275 an ounce on the Comex.
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The Bank of International Settlement holds 500.7 tonnes of gold as at the end of 2010. Why?
In the third quarter of 2009 it held just under 120 tonnes. These were part of currency/gold swaps. There are no details of the names of the counterparties. Coincidentally, they could be nearly the total of the ‘official’ gold holdings of Greece, Portugal and Spain.
What of Greece’s 111 tonnes of gold?
It is pure conjecture on our part to link the gold holdings of three of the Eurozone’s financially weakest members to the B.I.S.
In the first quarter of 2010 the B.I.S. recorded the jump in gold holdings that it had acquired. Four years prior to that Portugal and Spain had sold gold through the Central Bank Gold Agreement on the open market. So we do not link sales under that agreement with these B.I.S. transactions.
The B.I.S. acquired this gold though a set of Currency / Gold arrangements the details of which have not been made public. But it was at about this time that the Eurozone debt crisis reared its ugly head. In advance of any rescue plans, when the respective central banks probably first began discussions on the matter it would have been deemed prudent to makes a collateral arrangement using the asset of last resort, gold, to secure their gold against any future bailout package being offered.
While a swap arrangement is not a sale of gold nor is it a disposal, it is sufficient for the B.I.S. to record the gold swapped as an acquisition in its books. But the central banks involved need not record its disposal, giving us a rather clandestine situation.
Hence the question, “What of Greece’s 111 tonnes of gold?”
We cannot see just how the Greek bailout package can force the sale of state assets with no mention of its gold [worth $5.5 billion at present prices]. We have no doubt that Greece will cling onto the family’s jewels as long as possible, but the creditors will fight to get the gold as hard as Greece fights to hold onto it. Should the news come out that the gold was handed over last year in a futile ‘swap’ there will be fur flying and not a few of the present government will lose their seats in Parliament. It will be a very sensitive issue. Perhaps that’s why it hasn’t been mentioned yet?
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Mainland China has decreased its holdings of U.S. Treasury securities since last October, according to a report updated today by the U.S. Treasury Department.
Since September 2008, when they eclipsed Japan, entities in mainland China have been the largest foreign owners of U.S. government debt. But, as indicated by the Treasury Department chart linked here, Chinese ownership of U.S. Treasury securities peaked in October 2010 and has declined in each of the four most recent months reported by the Treasury Department.
At the end of October 2010, China owned 1.1753 trillion in U.S. Treasury securities. That dropped to $1.1641 trillion by the end of November, $1.1601 trillion by the end of December, $1.1547 trillion by the end of January, and $1.1541 trillion by the end of February 2011.
February is the latest month for which the Treasury has estimated foreign holdings of U.S. debt.
Back in February 2001, according to historical data reported by the Treasury, the mainland Chinese owned only $63.7 billion in U.S. debt. In the ensuing decade, the Chinese massively increased their holdings of U.S. Treasury securities, and especially in the past five years. In February 2006, China owned $318.4 billion in U.S. debt and Japan owned $656.4 billion.
In September 2008, the Chinese moved ahead of the Japanese in their U.S. debt holdings. At the end of that month, the mainland Chinese owned $618.2 billion in U.S. government debt and the Japanese owned $617.5 billion.
In the two years between September 2008 and September 2010, China increased its U.S. government debt holdings by $533.7 billion—from $618.2 billion to 1.1519 trillion. By the end of October 2010, China’s holdings of U.S. government debt had increased to their peak of 1.1753 trillion.
After that, mainland Chinese holding of U.S. government debt declined for four straight months.
Entities in Hong Kong have also been decreasing their ownership of U.S. government debt. Hong Kong ownership of U.S. Treasury securities peaked at $152.4 billion in February 2010. By the end of February 2011, that had dropped to $124.6 billion.
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