LAWRIE WILLIAMS: Central bank gold purchasing drops sharply in 2016
A week or so ago, we reported that far from increasing its gold reserves in December, China reduced them by a significant 20.98 tonnes based on a report from the usually very accurate goldchartsrus.com website from Nick Laird, who follows these things closely. Since then I’ve heard from Matthew Turner, of Macquarie, another close follower of these statistics, that this report is incorrect and Chinese gold reserves actually remained unchanged in December. I have not yet been able to confirm which of these reports is correct and thus will probably have to await the IMF tally of global central bank gold holdings to find out whether there was a reduction in Chinese holdings in December or if there was no change (which I have to admit seems the more likely of the two). China has been known to misreport its gold holdings in the past, so the conflicting reports may just be yet another instance of obfuscation of Chinese statistics – who knows?
But now we have the Russian central bank’s latest monthly report on its gold holdings and here we have to note that it too, apparently, ceased to add to its gold reserves in December and they remained unchanged following two months of very large increases. Indeed Russia has added a shade less than 200 tonnes to its gold reserves in 2016. They now stand at 51.9 million troy ounces, or about 1,614 tonnes, which keeps them in sixth place among global national holders of gold as reported to the IMF. This is still a couple of hundred tonnes below fifth placed China whether or not it actually reduced its holdings in December. But overall the gap between the two countries has been closing.
What all this means though is that the major consultancies’ estimates of central bank gold purchasing in 2016 will have been way too high. China has reported that it has cut back sharply on a month by month basis and we have seen some substantial metal movements out of national gold reserves by Venezuela in particular as it struggles with its global debt position. We commented back in June that on the figures available at the time it would be hard to forecast net Central Bank gold purchases as likely to exceed much more than 150 tonnes in 2016 – far lower than the 400-600 tonne forecasts by some analysts earlier in the year. Countries that are known to have been reducing their gold reserves In 2016, other than Venezuela, include Argentina, Azerbaijan and Turkey, although the latter is something of an anomaly in that it includes commercial bank gold holdings in its overall reserve figures. If we exclude Turkey, reported central bank gold holdings rose by around 211 tonnes as reported to the IMF up to November 2016 – but if we include Turkey this figure drops to only 92 tonnes. With the two biggest purchasers – Russia and China –either keeping reserves as is, or dropping them by 21 tonnes, depending on which proves to be correct, at best global central bank gold reserves may be up a couple of hundred tonnes, or as little as around 100 tonnes depending on whether Turkey should be included or not. But either way the total will be well short of the figures being predicted at the start of the year.
While this may have a significant effect on gold supply/demand fundamentals, we’re not sure that this even matters in the current gold pricing scenario. You can’t treat gold like just any other commodity where pricing should be hugely influenced by the supply/demand balance, but rather by perception and other extraneous factors which is why the price pattern is so hard to call. We think, for example, that the aftermath of President Trump taking office will have a far bigger impact on price than supply/demand fundamentals and, on the evidence of some of the rhetoric coming out of the White House over the weekend, this will likely prove positive for the yellow metal.