Gold Buying by Central Banks Signals Sell as Past Haunts Future
By Claudia Carpenter and Pham-Duy Nguyen
Dec. 16 (Bloomberg) -- Some of the biggest buyers of gold may be sending the strongest signal to sell it, if past performance is indicative of future results.
Central banks, holding about 18 percent of all gold ever mined, are expanding their reserves for the first time in a generation as a nine-year bull market drives prices to a record.
The banks will buy 13.8 million ounces (429 metric tons) this year, worth $15.5 billion, for the first net expansion in reserves since 1988, New York-based researcher CPM Group estimates. Gold fell 15 percent that year and took another 15 years to trade again at the same price as central banks from Switzerland to the U.K. cut their holdings.
India, China and Russia are now adding to reserves as gold nears its longest winning streak since at least 1948. They’re joining a rush as investors in exchange-traded funds amass holdings to rival the biggest central banks. Clive Capital LLC, manager of the biggest commodities hedge fund, had its best return since May last month, led by gains in precious metals.
“This is late in the game to be buying gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and former economic adviser to the U.S. government. “Central banks are not known for their investment acumen. What it reflects is a lack of confidence in the U.S. economy and the long-term durability of the dollar as a store of value.”
Countries were also increasing their holdings in 1980 when gold peaked at $850 an ounce, data compiled by the London-based World Gold Council show. The record was exceeded 28 years later.
20-Year Low
They sold a net 4,880 tons since 1999, as prices tumbled to a 20-year low of $251.95 an ounce, according to estimates from London-based researcher GFMS Ltd. Prices began to recover in 2001 and reached a record $1,226.56 on Dec. 3.
This year’s 5.4 percent slump in the U.S. Dollar Index, a measure against six counterparts, is increasing the appetite for bullion. While gold and the dollar are traditional stores of value in times of economic stress, the U.S. currency proved no refuge as the Federal Reserve more than doubled its balance sheet to $2.19 trillion in 15 months.
The dollar’s share of global currency reserves fell to a decade low of 62.8 percent in the second quarter, the International Monetary Fund said Sept. 30.
India bought 200 tons from the IMF in October, the Washington-based lender said. It was the biggest single central- bank purchase in at least 30 years over such a short period, according to Timothy Green, author of “The Ages of Gold.”
Russian Buying
Bank Rossii, Russia’s central bank, said it added about 15.5 tons of gold in October. The Bank of Mauritius bought 2 tons and Sri Lanka 10 tons last month from the IMF, part of 403.3 tons of planned sales to raise money and lend at reduced rates to developing nations.
“Gold is a good anchor and hedge to have in these volatile circumstances,” Sri Lanka’s Central Bank Governor Nivard Cabraal said in an interview in Singapore on Nov. 26.
Gold has jumped 27 percent this year in dollars and yuan, 31 percent in rubles and 22 percent in euros as investors sought to diversify their holdings amid the worst global recession since World War II. Governments spent at least $12 trillion to lift their economies out of the slump.
Kazakhstan, Venezuela and the Philippines will also add to their gold reserves this year, part of the first annual net purchases by central banks since Taiwan bought gold to diversify from dollars in 1988, according to Jeff Christian, managing director of CPM.
‘Managing Risk’
The buying is “part of managing risk by diversifying holdings,” Philippine central bank Deputy Governor Diwa Guinigundo wrote in a mobile phone text message Dec. 8. “With the dollar weakness, they think the next best solution is to go into gold.”
China’s holdings rose 76 percent since 2003 to 1,054 tons, the Xinhua News Agency reported in April, citing Hu Xiaolian, head of the State Administration of Foreign Exchange.
The nation may not find it “very necessary” to keep buying above $1,000 an ounce, Zhang Yuyan, an economist at the Chinese Academy of Social Sciences, said Nov. 5. The academy is a think tank under the State Council.
“There’s an illusion in gold,” Lee Eung Baek, head of the Bank of Korea’s reserve-management department, said in an interview Dec. 7. South Korea holds 14.4 tons of gold, ranking it 56th in the world, behind Nigeria and Belarus. “We follow the big trend. Gold isn’t the trend,” Lee said.
Governments, led by the U.S., Germany, Italy and France, hold about a combined 29,600 tons, according to data from the World Gold Council. Reserves expanded from 700 tons in 1870 to 38,000 tons in the 1960s, the data show.
Changing Constitution
Switzerland changed its constitution to allow gold sales of as much as 1,300 tons and the U.K. began its sales of about 400 tons in 1999. Switzerland’s 1,300 tons is worth about $47 billion today compared with about $12 billion in 1999.
The U.K. chose to sell its gold, a stack almost as big as two London taxis, in 17 auctions that ended in March 2002, investing the proceeds in dollars, euros and yen. The highest price it got was $296.50 an ounce in the final auction. That’s 74 percent less than today.
“We call it the Brown bottom,” said Ross Norman, referring to Gordon Brown, then the U.K. finance minister and now prime minister. “I think you could argue they are not good traders,” said Norman, a former gold trader and co-founder of London-based commodities information provider Fastmarkets Ltd.
Central Bank Agreement
Sales became such a weight on the market that 14 European central banks and the European Central Bank agreed to limit their disposals to 400 tons a year in September 1999. The accord was expanded to sales of 500 tons a year in 2004 and renewed again this year with a 400-ton cap.
“If it had not been for the central bank agreement, gold would have gone to $200,” said Philip Klapwijk, executive chairman of GFMS.
Central bank buying may support prices. The bull market of the 1970s, when gold rose from $35.17 at the end of 1969 to $512 by the end of 1979, was in part caused by central bank hoarding, according to Daniel Sacks, a money manager of the Investec Global Gold Fund at Investec Asset Management, which oversees about $47 billion.
“Central banks recognize the economic crisis could linger,” said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey, and former head of futures research for Merrill Lynch & Co. “Gold has assumed the front and center position as the alternative currency.”
To contact the reporters on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net; Claudia Carpenter in London at ccarpenter2@bloomberg.net
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