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What's Happening Inside The World's Central Bank Gold Vaults?

What's Happening Inside The World's Central Bank Gold Vaults?

You may have heard in recent news that global central banks have been increasing their stockpiles and buying up gold. But why are they doing this and what does it mean? Learn more in this article.

 

Central Banks Gold Holdings Increase

Fifteen percent of the total world’s gold demand came from central banks last year, collectively buying 651.5 tonnes between them (World Gold Council, January 2019). These were the most amount of central-bank purchases in nearly half a century. Then, in the first quarter of 2019, global official gold purchases totaled 145.5 tonnes, a 68% increase compared to the same period in 2018.

 

Did you know - All nations have expanded their gold holdings by about 14% since 2009, and as a total, is now valued at roughly £1.3 trillion?

 

Central banks have even continued to add gold to their reserves in June 2019, tracking an 8% gain from month to month, the biggest monthly surge in 3 years. This is all occurring whilst global trade and economic tensions rise. 

Nations from Russia to China and even Poland, have added to their reserves as economic growth slows, and new visions of wanting to diversify away from the dollar emerge. 

 

Gold Bar on Dollar Bills

 

Why Ditch the Dollar?

The most popular global currencies in use are the U.S. dollar, the euro, and the yen. The dollar is the most popular and makes up nearly 62% of all known central bank foreign exchange reserves. The next closest reserve currency is the euro, making nearly 21% of known central bank foreign currency reserves, (IMF, October 2018).

The world’s two biggest economies (China and the US) are currently involved in a simmering trade dispute that has resulted in billions in tariffs being imposed on imports and exports. In the latest escalation, the US increased tariffs to 25% on $200 billion worth of Chinese goods. In response, China introduced duties of 25% on 5,000 US products worth $60 billion, (New York Times, May 2019).

Chinese authorities are seeking 'determined diversification' away from US dollar assets, according to Helen Lau, who expects China to buy 150 tons of gold by the end of the current year (Argonaut Securities, June 2019).

The escalation in trade and other global geo-political tensions are some of the main motivators for diverting power away from the U.S. dollar.

Russia has also started ramping up its gold reserves in an effort to make its own currency (the ruble) have a stronger financial position. Setting a foreign currency and gold target of $500 billion, was a direct recommendation of President Vladimir Putin, who has long been following a 'fiscal fortress' policy of high reserves and low external debt, (Bloomberg, July 2015). Three-quarters of the nation’s annual $600 billion of trade being in dollars, so some analysts argue if this is at all even possible.

French President Emmanuel Macron admitted himself that European corporations and entities are too dependent on the U.S. currency, referring to it as "an issue of sovereignty", (CNN, November 2018).

Analysts now speculate whether the global economic impacts of this, where more countries are adopting a similar philosophy of using gold as a safeguard, would mean for the dollar’s desirability, especially compared with other strong assets, such as the Chinese yuan or the Japenese yen. 

Last year, Poland and Hungary surprised analysts and markets by making the first substantial gold purchases of a European Union nation in more than a decade. Poland increased their gold holdings by 100 tonnes bringing their total to 228.6 tonnes, and Hungary increased their reserves 10 fold, from 3.10 tonnes to 31.5 tonnes of gold, (Zerohedge, July 2019).

 

Gold Bar on Currency Bills

 

Current Gold Stockpiles

The top 15 countries with the biggest supply of gold are:

  1. The United States (8133.5 tonnes)
  2. Germany (3369.7 tonnes)
  3. Italy (2451.8 tonnes)
  4. France (2436 tonnes)
  5. Russia (2150.5 tonnes)
  6. China (1874.3 tonnes)
  7. Switzerland (1040 tonnes)
  8. Japan (765.2 tonnes)
  9. Netherlands (612.5 tonnes)
  10. India (608.7 tonnes)
  11. Taiwan (423.60 tonnes)
  12. Portugal (383.00 tonnes)
  13. Uzbekistan (354.90 tonnes)
  14. Kazakhstan (328.70 tonnes)
  15. Saudi Arabia (323.10 tonnes)

 

The Bank of England

The UK abandoned the Gold Standard in 1931 and is currently the 17th largest central bank reserve in the world, holding just 310.29 metric tonnes of gold bars. This is not that much in comparison to other countries.

You may remember Gordon Brown’s decision to sell off half of Britain’s gold reserves 20 years ago. At the time, this was written off as one of the worst financial decision of all time. Some analysts argued that this was sensible however, as doing so allowed Britain to diversify their assets elsewhere.

The Bank of England has a lot more gold stored in its vaults than this though. It's the second-largest keeper of gold in the world, after the New York Federal Reserve, and contains 400,000 bars of gold worth over £100 billion. If only the UK owned more of this themselves.

 

Bank of England Gold Stockpiles (Tonnes)

(Source: gold.org) 

 

The People's Bank of China 

China is the world’s top gold producer and consumer but has been facing signs of a slowing economy. The country has resumed adding gold to its reserves at a steady pace, much like the period from mid-2015 to October 2016, when the country boosted holdings almost every month (PBOC, 2016).

Aside from its attempt to diversify its holdings in dollars, owning more gold reserves is also an important strategy in China’s rise as a superpower. China has doubled its holdings a couple of times in the last 20 years. These aforementioned buying behaviors can be seen clearly in the graph below.

More recently, China has accumulated 74 tonnes of gold since the end of November 2018 alone, which is when it really started ramping up its purchases. Most recently in 2019, China’s reserves rose to 1,865 tonnes of gold in May, equating to a staggering $3.01 trillion, which was $6 billion higher than even the previous month, (The People's Bank of China, June 2019).

 

The People's Bank of China Gold Stockpiles (Tonnes)

(Source: gold.org) 

  

The Central Bank of the Russian Federation

Russia is another country that has been focusing on 'de-dollarising' its reserves. It bought 274.3 tonnes of gold in 2018, funded by the almost entire sale of its US Treasuries portfolio. This is the highest level of annual net purchases on record and the fourth consecutive year of +200 tonnes purchases from Russia. Its gold reserves have grown for 13 consecutive years, increasing by 1,726.2 tonnes over the period to a total of 2,113 tonnes of gold at the end of 2018.

Russia is using gold to guard against geopolitical shocks and the threat of tougher U.S. sanctions, (Reuters, February 2019). Some experts have questioned whether it can even afford to keep up this intense pace of buying. Gold buying exceeded mine-supply for the first time last year, so will current gold supplies exceed demand soon? 

 

The Central Bank of Russia Gold Stockpiles (Tonnes)

(Source: gold.org) 

 

Central banks are in the process of safeguarding their nation's financial backbone using precious metals. You can safeguard your financial assets by diversifying your own asset portfolio too. If you'd like to chat through some options or you'd like some more information on owning your own gold and silver, please contact Bleyer on 01769 618618 or email [email protected]

 

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