Gold buying by central bank to pick up in 2021 from a decade low: Reports

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Gold buying by central banks, an important driver of bullion’s advance in recent years, is forecast to pick up in 2021 after a slowdown this year.

Citigroup Inc. sees demand from the official sector rising to about 450 tonnes after a drop to 375 tonnes this year, which would be the lowest in a decade. HSBC Securities (USA) Inc. expects a slight up-tick to 400 tonnes from an estimated 390 tonnes in 2020, potentially the second-lowest amount in 10 years, quotes a mining.com report.

While the forecasts are far from the near-record purchases of more than 600 tonnes a year seen in both 2018 and 2019, increased central bank activity will help bolster bullion. Russia could return to the market next spring and China’s central bank may resume adding to reserves after the U.S. elections, Citi said in a report this month.

This development may have a bigger impact on the market if exchange-traded funds — key drivers of demand in 2020 — slow their buying as global economies recover from the coronavirus pandemic.

“Although official sector gold demand was quite robust in 2019 and 2018 and is softer this year, it is not necessarily weak by historical standards,” said analysts at HSBC. “While the influence of central bank activity should not be discounted, it is taking a backseat to ETFs and other forms of demand this year.”

Bullion prices and ETF assets surged to a record in 2020 as investors sought havens amid the pandemic, looser monetary policy and the potential debasement of fiat currencies. Spot gold has since dropped from its all-time high and is set for the biggest monthly loss since 2016, but is still poised to cap an eighth quarterly gain, supported by sustained flows into ETFs.

Colombia and Uzbekistan have been among countries that reduced their gold reserves in recent months, and the Philippines has said it’s considering selling. Russia announced it would cease purchases from April, while it’s been almost a year since China disclosed any moves.

While central banks were net buyers for a 10th straight year in 2019, demand has become more concentrated, with fewer banks adding to reserves in 2020, according to the World Gold Council. Purchases dropped 39% to 233 tonnes in the first half from the same period a year ago.

Each central bank determines the gold allocation that is optimal for its own situation. Some may have reduced holdings because the percentage of bullion in their reserves has become high, particularly as prices increased or because they’ve had to draw down on the non-gold portion of their reserves to maintain currency stability. 

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