Central Banks Will Remain Gold Buyers For The Next Two Years – Capital Economics
Central banks have slowed the pace of their gold purchases so far this year, but one commodity researcher at Capital Economics does not expect this trend will last, forecasting that purchases will strengthen within the next two years
One of the biggest purchasers over the next two years will be Russia as it continues to stabilize its economy by backing its currency with gold, Simona Gambarini, commodities economist at the UK-based research firm, said in a research note published Monday.
Russia is already in the process of boosting its foreign reserves given its significant depletion last year, when the government tried to prop up its tumbling currency. The country had to sell about $150 billion in its reserves as the ruble dropped to historic lows as a result of weaker oil prices and economic sanctions, which served as punishment for annexing the Crimean region from Ukraine.
As the central bank looks to replenish its reserves, Gambarini said she expects a significant amount of the purchases to be in gold.
“The sanctions regime is only likely to encourage the accumulation of Russian reserves in the form of gold, rather than U.S. dollar or euro assets that might be subject to additional legal and political risk,” she said.
“At the end of April, gold accounted for 13% of Russia’s reserves. We believe that the percentage of gold reserves held by the CBR could reach 18% over the next two to three years, if the bank keeps up the current rate of purchases. This would imply a doubling of Russia’s gold reserves, at current prices,” she added.
However, Russian isn’t the only buyer in the marketplace, Gambarini said that most emerging market central banks still have to diversify away from the U.S. dollar, and gold will benefit as a result.
“Most developing countries still hold less than 10% of their reserves in gold, compared to
70% or more in advanced economies. Admittedly, the much higher share in the latter is mainly a legacy of the Gold Standard. Nonetheless, an optimal share that makes the most of gold’s diversification benefits would probably be at least 15%,” she said.
Although central bank buying has not been significant enough to create a sustainable rally in the gold market, Gambarini said that it is one of the factors that is helping to establish the current flow around $1,200 an ounce.
She explained that central bank options are also limited as the ongoing Greek debt crisis creates uncertainty in euro assets, and extremely loose monetary policies make the Japanese yen unattractive. She added that the Chinese renminbi is still a considerable way from being a viable reserve currency.
By Neils Christensen |
