Central bank activity in the gold market over
the last decade has caused a great deal of confusion and
skepticism over gold’s role as a monetary asset class.
Previously, mentioning central bank activity
in the market was usually accompanied by a painful
downward spike in prices as the Bank of England,
Swiss National Bank or other European central banks
made public notice of their decision to sell 15, 25, or
even 50 percent of their official gold holdings into
the market.
"I think that the central bank should pay more attention to precious metals on Russian
territory when forming its gold and foreign-exchange reserves."
—Russian President Vladimir Putin
The European banks who have been selling
gold into the marketplace in an orderly fashion the
last five years under The Washington Agreementare
essentially running out of gold reserves that they are
able to continue to sell. France, Switzerland,
Belgium and others have been aggressively selling gold
the last few years to rebalance portfolio holdings.
The period of orderly, yet unrelenting,
Euro-central bank gold sales into the marketplace is
drawing to a close and a new period of central bank
purchasing is set to begin. Purchase of gold reserves
will be coming mostly from Russia and Asian banks
who will be looking for diversification of their
foreign exchange reserves away from U.S. Dollar
dominated holdings.
“Central Banks are the OPEC of gold. They will control the price of gold by selling until
they change their minds...”
—James ”Jim Bob“ Moffett, Chairman, Freeport-McMoRan Copper and Gold, Inc., January 2001
“I think we are going to see a record level of central bank buying [gold] this year...
Just a hint of Asian central bank buying would set the gold market on fire.
That’s going to be explosive.”
—Philip Klapwijk, Chairman, Gold Fields Mineral Services, Ltd., December 2005
Russian President Vladimir Putin applauded
comments from the Russian central bank that the bank
would double its current gold reserve holdings. "I
think that the central bank should pay more attention
to precious metals on Russian territory when forming
its gold and foreign-exchange reserves," Putin said
at a gold industry conference in Russia, on
November 22, 2005.
“China should increase its gold reserve from 600 tons to about 2,500 tons in a short term
and to 3,000 tons in a long term to cope with the versatile exchange rate risks. Too little
gold reserve would pose threat not only to China, but also to the global monetary system.”
—Teng Tai, an economist of China Galaxy Securities Company, December 26, 2005
This commitment by the Russian bank has
been followed by rampant speculation that China
will follow suit and begin diversifying their holdings
into gold.
A shift in reserve holdings by any Asian central
bank following the commitment of the Russian central
bank to increase gold reserves will have a profound
and immediate impact on the gold market. A
corresponding trend of Asian bank buying and
European sales slowing will be the major driver for
the gold price in the first half of 2006.
