Central banks turn net buyers of gold

Investors in the gold have generally been rather lucky for 10 long years beginning 2002 as investment in it proved lucrative by giving double-digit returns. Many supportive factors materialised from time to time to prop up prices. Often, haven buying boosted gold demand.
One or a combination of reasons such as geopolitical instabilities, easy money policy, weak dollar, tepid equity markets, robust investor interest and demand surge in gold-crazy markets such as India helped prices spiral higher.
Price collapse
After the global meltdown in 2008 that created a risk-off environment, the bull-run in the yellow metal was driven by humungous liquidity. This followed the stimulus packages and quantitative easing announced by many countries, including the US.
As most of the support factors began to weaken and a risk-on environment materialised from early last year, the gold market witnessed a massive price collapse in April 2013. Prices dropped to as low as $1,200 an ounce while the peak was in excess of $1,800/oz a year ago.
Less-committed speculators exited their long positions on the bourses while physically-backed gold-exchange-traded products witnessed large outflows. A major importer-consumer India discouraged gold imports to fight the widening current account deficit. Many experts believed that it was the end of gold’s reign. With the US Federal Reserve’s decision to rollback asset purchase, the liquidity in the marketplace was sure to dry up. Yet, the metal has been lucky to bounce back and stay at around $1,300/oz since the beginning of the year, again for a variety of reasons including geopolitics (Russia-Ukraine conflict) and slow recovery of the dollar. How long the metal’s lucky streak will run is anybody’s guess.
Central bank purchases
One of the less-emphasised factors is the central bank purchases. For four years in a row, central banks have been net buyers of gold (rather than sellers) and official sector sales have substantially slowed. Last year, when gold prices crashed, there was expectation that the central banks would begin to slowly liquidate their gold holdings.
Nothing of that sort happened. If anything, central banks continue to buy gold as part of asset diversification. In the first half of 2014, such purchases accounted for 113 tons. According to estimates, the buyers were mainly Russia (60 tons), Iraq (47 tons) and Kazakhstan (12 tons). Whether central banks will continue to buy in the coming months is unclear.
However, it is clear that official sector sales in sizeable quantities by central banks and international financial institutions such as IMF may not materialise. The recent Indian government announcement that it was in no mood to rollback restrictions on gold including 10 per cent ad valorem customs duty is, of course, a dampener for gold prices.
Source: Hindu business line
Source:Bullion Bulletin

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