Central banks have once again become net purchasers of gold after more than a decade of predominating the sell side of the trade. They are on pace to make it seven consecutive years of adding to their gold reserves on aggregate.
Two of the main players in this bullion buying trend are Russia and China, whose respective central banks were adding more gold to their reserves in September. As this trend continues, it tells us both about demand dynamics in the gold market and the divergence of global economic policies.
Flowing West to East
There is a general trend in the international gold market that has been accelerating for roughly the last decade: gold is being sold by investment banks and institutional investors in the West to consumers and central banks in the East. While this includes a massive amount of gold being bought by private citizens and businesses in India, the main institutions contributing to the West-East flow are the People's Bank of China and the Russian Central Bank.
Russia in particular has been at the top of the list in growing its official gold reserves, consistently buying gold throughout the year. After adding over 30 metric tonnes (1 million troy ounces) of gold to its reserves in August, Russia raised its purchases to over 34 tonnes in September.
The Russian Central Bank has accumulated over 100 tonnes of gold per year, on average, since 2008. Excluding the IMF, it currently has the world's 6th-largest gold reserve holdings at over 1,288 tonnes.
Former Soviet satellite states like Kazakhstan and Belarus have also been active gold buyers, likely as a means of diversifying away from the dollar. Belarus increased its reserves by an impressive 47 tonnes in August, while at the same time August marked the 35th consecutive month (essentially 3 straight years) that Kazakhstan's central bank added to its gold reserves.
In the case of China, the vast quantities of gold being imported for official purposes results from a mix of economic strategy and cultural affinity. While the PBoC is also intent on balancing its enormous USD reserves with a safe haven like physical gold, it is also true that the Chinese people are among the most fervent gold-buyers in the world.
Demand Rebound in China
Chinese gold demand is projected to rise in Q4 after a disappointing first three-quarters of the year. This will likely be due to the low prices for precious metals and consumers anticipating the Chinese Lunar New Year. So far, the early returns are encouraging: the Shanghai Gold Exchange is on pace to break its annual record for withdrawals set in 2012, when 2,181 tonnes of gold was delivered through the SGE.
Although the SGE withdrawal numbers are really a measure of throughput more than physical purchases, it is a useful proxy for gold demand on mainland China.
At the same time, gold jewelry sales in Hong Kong are also expected to remain strong through the end of 2015.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.