Filed 22 November 2012, 11:11 IST. Every price, volume and forecast below is reproduced as published on that date and is not a current quotation. For how the benchmarks themselves are set, see how gold is priced.
Official-sector gold purchases were on course to reach around 500 tonnes for 2012, which would make it the heaviest year of central-bank buying in decades. The buyers were not the traditional large holders in western Europe and North America but a group of emerging-market central banks diversifying reserves away from a narrow set of currencies.
The direction is what made the figure significant. For most of the two preceding decades the official sector had been a net seller of gold, under a coordinated arrangement designed to keep those sales from disrupting the market. From around 2010 it became a net buyer, and stayed one.
Why central banks buy gold
Reserve management, not investment. A central bank holds reserves to defend a currency, settle international obligations and maintain confidence, and the composition of those reserves is a question about correlation and counterparty risk rather than about return. Gold's attraction in that frame is specific: it is nobody's liability. A holding of foreign government bonds is a claim on that government; a holding of gold is not a claim on anyone, and cannot be frozen by the issuer of another currency.
That property became more salient after 2008 for reasons that had nothing to do with the gold price. Reserves had grown very large and were concentrated in a small number of issuers, several of which were running unprecedented monetary policy. Diversification was a risk-management response, and gold was one of a small number of assets with sufficient depth to absorb the amounts involved.
How official buying differs from investment buying
A central-bank holding turns over slowly, is not marked to market in a way that forces sales, and is rarely disclosed in real time. That makes 500 tonnes of official buying a structurally different thing from 500 tonnes of exchange-traded fund inflows, even though both are reported in tonnes and are routinely compared directly.
The contrast became sharp the following year. In 2013 official buying continued while fund holdings fell heavily as investors redeemed after the price break, with metal physically leaving vaults and moving toward Asian demand. Same unit, opposite direction, completely different behaviour: the fund side is covered in the ETF section, and the figure from this dispatch is one of the two bands sourced to this archive in the demand graphic on the homepage.
Questions about this dispatch
Why did central banks start buying gold again?
Reserve diversification. Reserves had grown very large and were concentrated in a small number of currency issuers, several running unprecedented monetary policy after 2008. Gold's specific attraction in that context is that it is nobody's liability: it is not a claim on any government and cannot be frozen by the issuer of another currency.
Which central banks were buying?
Predominantly emerging-market ones. The traditional large holders in western Europe and North America were not adding; the buying came from central banks whose reserves had grown rapidly and were heavily weighted toward a few currencies. That is a reversal of the preceding two decades, when the official sector was a coordinated net seller.
Is 500 tonnes of central-bank buying comparable to 500 tonnes of fund buying?
Not behaviourally, though both are quoted in tonnes. A central-bank holding turns over slowly, is not subject to mark-to-market redemption pressure, and is rarely disclosed in real time. A fund's holding is the aggregate of thousands of positions that can reverse within weeks, as happened in 2013, when fund redemptions pushed metal out of vaults while official buying continued.
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