Central banks pounce on falling gold, buying it through BIS

By Jack Farchy
Financial Times, London
Friday, March 16, 2012 

A sharp fall in gold prices has triggered large purchases of bullion by central banks in recent weeks, according to several traders with knowledge of the transactions.

The buying activity highlights the trend among central banks in emerging economies to buy gold, even as some Western investors are losing patience with the metal. Gold prices have dropped 13.8 per cent from a nominal record high of $1,920 a troy ounce reached in September, and on Friday were trading at $1,655.60.

The Bank for International Settlements, which acts on behalf of central banks, has been buying significant quantities of gold on the international market amid falling prices, traders said.

According to several estimates, the BIS bought 4 to 6 tonnes of gold, worth roughly $250 million to $300 million at current prices, in the over-the-counter physical market last week, with purchases particularly strong at the end of the week. The total purchases over the past three or four weeks was likely to be as much as double that, the traders added.

In a note to clients this week, Credit Suisse referred to "aggressive central bank buying seen last Friday."

The BIS declined to comment.

Central banks are one of the most important drivers of the gold market, holding one-sixth of all the gold ever mined in their reserves, but they disclose few details about their activities.

As a group, they made their largest purchases of gold in more than four decades last year, led by emerging economies such as Mexico, Russia, and South Korea intent on diversifying their dollar-heavy foreign exchange reserves. The World Gold Council has also pointed to the possibility of significant unreported purchases by China at the end of last year.

At the same time, European central banks have all but halted a run of large sales.

"Central banks have definitely been looking at gold as an asset class much more closely ever since European central banks stopped selling," a senior gold banker said. "There has been a huge interest."

While some countries, such as Russia, China, or the Philippines, have traditionally accumulated gold produced by their domestic mining industry, others use the BIS as an agent to carry out purchases and sales on their behalf, preserving anonymity.

The central bank buying comes as gold prices have slid in the past three weeks as strong economic data from the US has lowered investors' expectations of quantitative easing by the Federal Reserve and made other investments, such as equities, appear more attractive.

Gold prices this week fell to their lowest since mid-January after the Fed struck an optimistic tone on the US economic recovery. "It's clear that the market trend right now is an unwinding of safe-haven exposures, like gold, and a preference for growth assets," said Edel Tully, precious metals strategist at UBS.

Buying from large physical consumers of gold such as China and India remains sparse, despite the fall in prices. India on Friday announced it would double import tariffs for gold, a move analysts said could damp demand.

"Asian physical demand remains lacklustre," Credit Suisse said, arguing that gold prices could fall below $1,600. "Gold has now slipped back toward the middle of its long-term trend and has room to drop further."

Source : http://www.gata.org/node/11139