Central banks buy 571% more gold
At The Real Asset Co we frequently discuss the factors which drive people to buy gold. Recently we have discussed the dangerous actions of central banks to devalue currencies which is driving more people to gold investment. Today the World Gold Council released their report ‘Gold demand trends: Full year 2011’. The Real Asset Co take a look at the report which illustrates the pace at which people are turning to gold in response to the changing economic climate. Gold investment demand is expected to go from strength to strength in 2012. More individuals, along with central banks, are turning to gold as a hedge against inflation and currency devaluation.
2011 was a ‘tricky’ year for gold according to the WGC. During the year the yellow metal reached new highs of $1,895/oz but finished the year at $1,531/oz. Many speculators believed this was the end of gold’s 11-year bull-run. However the average price in 2011, of $1,571.52/oz was 28% higher than the equivalent in 2010. This doesn’t seem to be the end of the bull market to us.
The majority of gold investment was within physical bars and coins. The increased strength in gold demand appears to be due to uncertainty in the global markets, particularly as the two major reserve currencies are teetering dangerously at present.
Central Banks buy gold
Late in 2011 we wrote of Central Banks becoming net buyers of gold for the first time since the 1960s. 2011 proved to be a big investment year for the central banks who, along with official institutions, increased their purchases by 571%, from 77 tonnes in 2010 to 440 tonnes in 2011.
According to the WGC, ‘this activity reflected a continued desire among central banks to diversify their sizeable reserves in light of credit downgrades which have brought into question the safety of holding massive amounts of US dollar and euro-denominated reserves.’
In 2011, Mexico dominated the Central Bank purchases, buying 100 tonnes. This was closely followed by Russia. This is not surprising news. Earlier this month we discussed the increasing moves by countries to abandon the dollar for gold. Mexico’s proximity to the US may well have left it feeling vulnerable in the snowballing economic crisis. Whilst in Russia there are rumours of gold payments for oil, something which has been discussed for many years.
Gold Investment Demand
The World Gold Council looked at gold demand in three separate categories: Technology, jewellery and investment. Of the three, investment demand has seen the greatest increase in the last year. It reached a 14-year high in 2011. The other categories saw a decrease in demand; jewellery, for instance, saw a 15% year on year decline. However this huge increase in investment demand “helped to counterbalance declining demand in the jewellery and technology sectors.”
Annual demand for bars and coins in 2011 reached a record-high of 1,486.7 tonnes, 24% higher than in 2010. Physical bar demand saw a 29% increase compared to ETFs which saw a decrease of 58%. Perhaps the concerns about counterparties and ETFs are having an effect on market participants?
In regard to where this investment demand for bars and coins originates it appears to be a global movement. The WGC state that, during 2011 “net-investment demand was the result of a mixture of liquidity-driven selling and store of wealth buying and speculation on either side of the equation”.
The demand for bars and coins appears to be geographically widespread, with the exception of the US, Egypt and Japan reporting a decline in gold investment demand. A number of countries saw an ‘upsurge’ in physical bar demand in allocated accounts, particularly in Turkey and German speaking European markets.
China and the high gold price
China is set to usurp India as the world’s biggest buyer of gold in 2012. The Chinese seem to prefer to buy an ‘established rising trend,’ so when the price dropped slightly in Q4 of 2011, so did Chinese demand. However early reports show that it has picked up once again in 2012 as the gold price makes a speedy recovery.
Regardless of low buying levels in Q4 of 2011, the overall annual demand of 258.9 tonnes ‘eclipsed 2010 levels as the first 9 months of the year were dominated, ‘by rising gold prices, which in turn fuelled positive price expectations, high inflation, poor performance of alternative assets and an increased availability of gold retail investment products.’
Gold – the inflation hedge
Many countries’ gold buying activities are remarked upon in the report. However one which is particularly worth noting is Vietnam. Vietnam is a country which is frequently noted for its belief in gold, it acts as a third currency in the country preferred over both the dong and the US dollar. According to the WGC, the Vietnamese ‘continued to clamour for gold bars’ seeing a 50% increase in Q4 compared to the average for Q4 2008-2010.
This 30% increase to 87.3 tonnes in physical gold demand and gold investment in Vietnam, is fuelled by ‘persistent high inflation’.
The gold standard of a safe haven
Turkey also saw increased demand for gold bars, which they are increasingly choosing as ‘their investment vehicle of choice’. The World Gold Council states this is due to ‘Turkish investors who are increasingly troubled by the on-going crisis in the euro area’ therefore they are turning to gold for its ‘insurance properties’.
In Europe, the centre of much mistrust and insecurity, gold investment demand registered its 7th annual gain, reporting purchases of a record 374.8 tonnes. Germany accounted for the largest proportion of investment in the European region, something which we expected after last year’s reports. Demand reached record levels and was 26% above those in 2010.
The WGC report also made a point of shining a light on the ‘other Europe” category. These countries, ‘now account for a considerable proportion of investment in the region.’ Like the rest of Europe, a ‘substantial amount of this new demand has been generated by countries with previously no or very little interest in gold investment, including the UK and a number of Eastern Europe countries.’
Whilst there was far more discussion in the WGC report, we believe the most important points to come from the report are the one-way street which is gold investment. There is little disagreement as to why and how both individuals and governments decide to buy gold. They buy as an insurance against the toppling economy and they buy physical bars due to its distance from the banking system and it’s historically proven worth.
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