The Gold Market Sea Change

“Something important is happening in the gold markets right now,” observes Chris Mayer. “All through the 1990s to the present day, the world’s central banks were net sellers of gold. Europe’s central banks, for instance, have sold 3,800 tonnes of gold in the last 10 years. According to the Financial Times, this move has cost them $40 billion, as gold is now $900 an ounce.

“But suddenly, that long-standing tradition of selling gold is changing. Last year, central banks sold 246 tonnes, which was the lowest amount in 10 years, but still 10% of all mined gold.

“As the FT reports: ‘Sales in Europe have slowed to a crawl and fresh demand is emerging elsewhere and the financial crisis has helped to highlight gold’s value in turbulent times.’ In fact, we may soon see central banks flip to net buyers of gold. That would be a sea change from what has existed in the past.

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“China has doubled its holdings of gold this year and is now the world’s fifth largest holder of the metal. China is likely to be a buyer of gold for years because its gold holdings are still very small relative to the size of its total reserves. Gold represents only 1.6% of China’s reserves, versus a global average of nearly 11%. To further diversify its reserves — just to get to average — would require significant amounts of gold.

“In addition to China, Russia, Mexico, the Philippines, Venezuela and Ecuador are all buying gold. The U.S., the largest holder of gold, has not been a seller.

“This is what we’d expect to see. Gold competes with other cash substitutes. Therefore, its attractiveness often boils down to relative credit quality.”