Emerging markets have beefed up gold holdings, undeterred by prices near their highest levels in more than six years, as countries such as Russia and China diversify their foreign-exchange reserves—a trend that is likely to continue.
“Central bank buying is, of course, important to the supply/demand dynamic for the metal, but is much more important in terms of sentiment toward the metal,” says Brien Lundin, editor of Gold Newsletter. When central banks are “buying as heavily as they are, it provides cover and a rationale for other central banks to do the same.”
Russian central bank gold reserves stand at 2,219.2 metric tons, according to the World Gold Council, or WGC, based on the latest data available in September from sources including the International Monetary Fund. China’s holdings are at 1,936.5 metric tons.
Given the latest prices, with the most-active gold futures contract GCZ19, -0.57% settling at $1,499.50 an ounce on Friday, and about 32,151 troy ounces in one metric ton, the value of Russia’s gold reserves is at roughly $107 billion.
The moves are due to concerns about the outlook for currencies, including the dollar and the euro, says Mark O’Byrne, research director at GoldCore in Dublin. “While the gold tonnage demand from central banks in recent months has been significant and near records, gold remains a tiny fraction of most central banks’…foreign-exchange reserves,” he says, adding that the trend is “sustainable and indeed may accelerate.”
O’Byrne added that the risk of the trade war descending into a currency war may also be feeding central bank diversification into gold.
Central banks had a record first half of the year, collectively buying 374 metric tons of gold through June, says Juan Carlos Artigas, director of investment research at the WGC. That was the highest first half of the year since central banks became net buyers in 2010. Net purchases from central banks year to date are still below those of 2018, but with the significant level of central bank purchases this year, “we will likely be above the 10-year average,” says Artigas.
The price of gold, which has climbed to six-year highs on and off since June, hasn’t hurt that appetite for the precious metal. Gold futures settled at $1,560.40 on Sept. 4, the highest finish since April 2013.
“Price is not the determining factor in central bank buying—rather, [the banks] are more likely being guided to secure an allocation of a percentage of their overall foreign-exchange reserves in gold bullion,” says O’Byrne. The central bank diversification and hedging are likely to support gold at these levels and could be a driver of higher prices in the coming months, he says.
The WGC reported that gold holdings in Russia represent 19.6% of its total foreign reserves, while gold holdings are a mere 2.8% share of China’s total foreign reserves. “China and Russia are obviously intent on insulating themselves from a dollarized global economy, and gold seems to be a very important part of that strategy,” Lundin says. “While gold still represents a relatively small portion of China’s total foreign reserves…[the Chinese] seem to feel that gold will become more valuable over time, while the dollar will become less so.”
The rush of central bank gold buying doesn’t say much about where near-term prices of gold are headed, but it does say “a lot about where it’s going over the long term, or at least where the banks believe it’s going,” Lundin says.