Emerging Market Central Banks Set To Remain Tailwind For Gold Prices

Learn more about this firm

For the last decade, central bank gold purchases have accounted for between 10% and 15% of total gold demand. Led by emerging market central banks, this demand has provided key support for gold prices, but with macroeconomic developments reshaping the global economy, some are beginning to question if central banks will change their buying behaviors. Fortunately for gold investors, there’s good reason to be optimistic moving forward.

According to the World Gold Council’s latest annual central bank survey, the number of central bank respondents that expect their own country’s official gold reserves to increase over the next 12 months has climbed to 25% - up from 21% last year. Providing even more optimism, 61% of respondents believe global gold reserves will continue to increase over the next year.

To better understand why strong buying is expected in the near future, a look back in time reveals three relatively distinct central bank gold purchasing cycles over the past 50 years.

Nearly Net Neutral Purchasing/Selling of Gold: 1971 to 1988

In this period of insignificant buying and selling of gold, transactions were primarily driven by four catalysts. The USSR sold gold to offset the failures of the Soviet command economy. The International Monetary Fund (IMF) sold gold in an attempt to establish the Special Drawing Right as a reserve currency. South Africa sold gold to raise funds after the U.S. enacted the Comprehensive Anti-Apartheid Act in 1986, and the U.S. sold gold to help solidify dominance of the dollar within the international monetary system. These sales were balanced by numerous small purchases by other central banks.

Significant Net Selling of Gold: 1989 to 2009

The end of the 1980s marked the beginning of a notable selling period of gold that continued until 2009. It is important to note that the largest sellers during this period were mainly the governments of developed markets ranging from the Netherlands, Belgium, and Australia to the UK, South Africa, and Canada. Toward the end of the 2000s, we began to see a shift occurring, as emerging market countries started to buy gold for their official reserves. However, the buying from these emerging market countries was overshadowed by the heavy selling of Western Europe and North American economies.

Learn more about this firm