Why Central Banks are Buying Gold Fastest Since 2012 ?

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CENTRAL BANKS are buying gold for their reserves at the fastest pace in 6 years according to new analysis, writes Atsuko Whitehouse at BullionVault.
January-to-September saw 264 tonnes added to official-sector gold holdings says a note from Australia-based financial group Macquarie, “by far the most at this stage of the year of any period in the last six years.”
That total includes 9 tonnes added to the gold reserves of Poland – the first growth for any European Union’s gold bullion holdings so far in the 21st Century.
Across the world, the total adds 0.8% to official-sector holdings for 2018 to date.
Already by end-June, data compiled by market-development group the World Gold Council said, central banks had added a net total of 193 tonnes of gold to their reserves in the first half of 2018 – an 8% increase from the 178t bought in the same period last year.
Chart of central-bank gold buying. Source: Macquarie
During the first 6 months of this year, gold buying by Russia, Turkey and Kazakhstan accounted for 86% of central bank purchases.
Egypt bought gold for the first time since 1978, while India, Indonesia, Thailand and the Philippines re-entered the market after multi-year absences.
The Reserve Bank of India added 8 tonnes of gold, buying for the first time in almost nine years, and then added another 7 tonnes by the end of August according to the latest data from the World Gold Council.
The RBI last bought gold in late 2009, acquiring 200 tonnes from the International Monetary Fund to become the No.11 largest holder.
Gold Rush

 

Taking into account the 106 tons the country purchased in the first half of the year, Russia’s gold reserve has now exceeded 2,036 tons, worth around 78 billion dollars.

Russia thus entered the top five gold-holding nations, surpassed only by the US, whose reserve accounts for 8,133.5 tons, Germany with its 3369.7 tons, Italy (2,451.8 tons) and France (2,436 tons.)

If Russia continues its purchases at the same pace, it will overtake France by 2020, whereas the Central Bank seems to be set to increase its gold reserve in light of the Central Bank’s First Deputy Head Dmitry Tulin branding the asset  “a 100 percent guarantee against legal and political risks.”

Meanwhile, the status as some of the most active buyers of gold has recently been claimed by Turkey and China –countries that have lately had a tense relationship with the United States.

They have also become major vendors of US Treasury securities over the course of the year, with Russia having cut its investments in the US national debt to 1/8 of what it was previously.

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“[This] suggests gold’s appeal to central banks might be widening,” says Macquarie.
“Looking ahead, we expect central bank demand to remain buoyant,” says the World Gold Council’s latest report on central-bank gold buying.
“Diversification will continue to be an important driver of demand, as will the transition to a multipolar currency reserves system over the coming years.”
The heaviest central-bank gold buyer, Russia has reduced its holdings of US government bonds by about four-fifths so far this year, leading to speculation that Moscow is dumping American assets to reduce Washington’s power over it.
Russian Monthly Gold Purchases June 2014 - February 2018
“[Gold] is a 100% guarantee from legal and political risks,” the central bank’s First Deputy Governor Dmitry Tulin said earlier this year.
On BullionVault’s analysis, Moscow has bought 70% of Russia’s gold-mining output since 2013, when international sanctions were first imposed following the Russian military intervention in Ukraine.
Russian Gold Reserves June 2015 - February 2018
More sanctions were added after US intelligence agencies concluded that Moscow interfered in the 2016 presidential election, won by Donald Trump.
The latest US sanctions aim to punish Vladimir Putin’s government for the March 2018 nerve-agent attack on former double agent Sergei Skripal and his daughter in the UK.
“In a gold market struggling from too much supply and not enough demand,” says Macquarie, “[central-bank buying] has been a lifeline…the only unambiguously positive sector at the moment.”
The world is approaching a new era of instability, with the prospect of a global crisis seeming more and more tangible, and many expressing certainty that the looming upheaval will primarily affect the US economy and the dollar.
In mid-October, Ulf Lindahl, the head of the company AG Bisset Associates, specializing in currency markets, stated that the value of the dollar might decrease by 40 percent with regard to the euro in the next five years.

Investors’ negative expectations are also reflected in a recent poll of 174 investment fund managers, whose total assets amount to 518 billion dollars.

The poll was conducted by the Bank of America (BofA). The respondents said that over the last couple of months, they had reduced the amount of US stocks by 17 percent on average, due to the increased volatility of the country’s markets.

The aluminum and steel tariffs, as well as Chinese import limitations introduced by Donald Trump earlier this year, have already had an adverse effect on the quarterly financial statements of major American companies, 3M and Caterpillar in particular.

Separately, the trade war with China has led to an upheaval for US farmers, after Beijing curbed its purchases of US agricultural produce in response to the tariffs.

Prices for soy beans have since dipped by 18 percent, corn is selling at 12 percent cheaper, and pork has gone down in price by as much as 29 percent.

31 percent of investment fund managers consider the Federal Reserve’s policies to be the second biggest risk.

“By increasing interest rates for dollar loans, the Federal Reserve simultaneously steps up the pace of the retrieval of the 3.5 trillion dollars, poured into international markets after the 2008 crunch,” chief economist at ING Bank James Knightley pointed out.

“Since October, the volume of operations aimed at reducing the balance has grown to 50 billion dollars per month: the Federal Reserve will balance Treasury bonds worth 30 billion dollars, and mortgage ones worth 20 billion.”

As of the end of July, China has 1.2 trillion dollars’ worth of US national debt stocks.

By dumping the stocks into the market, Beijing is believed to thereby doom the American economy to a new financial crisis, with the dollar expected to go down in price.

Therefore, on the threshold of new economic upheavals, both investors and central banks are continuing to rely on good old gold.

The U.S. debt to China is $1.17 trillion as of August 2018.

That’s 19 percent of the $6.3 trillion in Treasury bills, notes, and bonds held by foreign countries.

The rest of the $21 trillion national debt is ownedby either the American people or by the U.S. government itself.

China holds the greatest amount of U.S. debt by a foreign country. Japan comes second at $1.03 trillion, followed by Brazil and Ireland at around $315 billion each.
The United Kingdom holds $273 billion. These are the top five countries owning U.S. debt.

How China Became One of America’s Biggest Bankers

China is more than happy to own almost a fifth of the U.S. debt owned by foreigners. Owning U.S. Treasury notes helps China’s economy grow.

It keeps the yuan weak relative to the dollar. As a result, Chinese exports are less expensive than U.S. products. China’s highest priority is creating enough jobs for its 1.4 billion people.

The United States allowed China to become one of its biggest bankers because the American people enjoy low consumer prices. Selling debt to China pays for federal spending that spurs U.S. economic growth.

It also keeps U.S. interest rates low. But China’s ownership of the U.S. debt is shifting the economic balance of power in its favor.

Why China Owns So Much U.S. Debt

China makes sure the yuan is always low relative to the U.S. dollar. Why?

Part of its economic strategy is to keep its export prices competitive.

It does this by holding the yuan at a fixed rate compared to a “currency basket” of which the majority is the dollar.

When the dollar falls in value, the Chinese government uses dollars it has on hand to buy Treasuries.

It receives these dollars from Chinese companies that receive them as payments for their exports.

China’s Treasury purchases increase demand for the dollar and thus its value.

China’s position as America’s largest banker gives it some political leverage.

Now and then, China threatens to sell part of its debt holdings.

It knows that if it does, U.S. interest rates would rise, slowing U.S economic growth.

China often calls for a new global currency to replace the dollar, which is used in most international transactions.

China does this whenever the United States allows the value of the dollar to drop. That makes the debt China holds less valuable.

What Happens If China Called in Its Debt Holdings

China would not call in its debt all at once. If it did, the demand for the dollar would plummet.

This dollar collapse would disrupt international markets even more than the 2008 financial crisis. China’s economy would suffer along with everyone else’s.

It’s more likely that China would slowly begin selling off its Treasury holdings.

Even when it just warns that it plans to do so, dollar demand starts to drop.

That hurts China’s competitiveness. As it raises its export prices, U.S. consumers would buy American products instead.

China could only start this process if it further expands its exports to other Asian countries and increases domestic demand.

China’s Debt-Holder Strategy Is Working

China’s low-cost competitive strategy worked. Its economy grew 10 percent annually for the three decades before the recession.

As of 2018, it’s growing at nearly 7 percent, a more sustainable rate.

China has become the largest economy in the world, outpacing the United States and the European Union. China also became the world’s biggest exporter in 2010.

China needs this growth to raise its low standard of living.

Despite its threats, China will continue to be one of the world’s largest holders of U.S. debt.

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