Central banks' 2012 gold buys biggest since 1964

The world’s mines are still running well behind demand, the gap in global consumption still being made up by recycled gold. Total mine supply last year was 2827 tonnes with recycling adding another 1625 tonnes.

But there are also signs that recycling supplies have hit a plateau and may have even begun to decline - which, if that trend continues, might be enough on its own to trigger more metal prices rises in 2013.

These are the two big messages out of the World Gold Council’s report for 2012.

Meanwhile Chinese buying - while remaining steady, and seemingly taking a pause from growth in 2012 - is still one of the biggest demand factors for the yellow metal. In just the three months to December 31, Chinese gold consumption totalled 199.6 tonnes. That’s more than a quarter of total world mine production which hit 725.3 million tonnes for the December quarter.

Demand for gold in 2012 was slightly down (by a neither here nor there 4 per cent). One of the contributing reasons was probably the state of the rupee - India being the world’s largest importer. While the price of gold in US dollars rose from an average of $US1571.5 an ounce in 2011 to $US1669/oz in 2012 (an increase of just over 6 per cent), the leap in the cost of gold in rupees was from Rs23,624/oz to Rs28,639/oz, or a rise of 21.2 per cent.

Globally, though, the value - as opposed to the tonnage - of total gold transactions in 2012 hit a new record - $US236.4 billion.

While central bank buying of gold soared, so too was the net cast wider, with the central banks of Brazil, Paraguay, Iraq and Venezuela topping up their piles of gold bars.

In this writer’s view, far too much weight is given by commentators to those factors which have influenced gold for the past 10 years or even longer, that is, the relationship with the US dollar and the safe haven effect in times of crisis (although that still works, as shown by recent upsurge in Egyptian gold buying). These are still important, but in 2013 it should be worth keeping an eye on central banks whose official holdings are low by world averages.

China is the prime example, with only 2 per cent of its official reserves in gold (although that figure is almost certainly outdated, and the world will no doubt be startled when Beijing gets around to updating its 2009 holdings figure).

Set aside the US (76 per of its official reserves in gold) and Germany (73 per cent), and recognise that even if China were aiming for something like Switzerland’s 11 per cent, that would involve the Chinese central bank buying around 4,740 tonnes, or around two years’ of global mine supply.

Other central banks whose gold holdings, while being in the top 40 of holders, are way below the average are those of Taiwan (6 per cent of its reserves in gold), Saudi Arabia (3 per cent), Thailand (4 per cent), Singapore (3 per cent), Mexico (4 per cent), South Korea (1 per cent) and Indonesia (4 per cent).

Australia, incidentally, holds 79.9 tonnes of gold (9 per cent of official reserves). But don't expect the Reserve Bank of Australia to be a buyer: that would signal too great a loss of face after having sold 167 tonnes of gold at near the bottom of the market in 1997 when gold barely reached $US360/oz. It closed last night at $US1635/oz.

Source: The Australian: http://www.theaustralian.com.au/