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"Fiat Currency Caution" Driving Central Banks to Buy Gold

CENTRAL BANKS choosing to Buy Gold could be doing so out of concern for the value of their exchange reserves, according to a leading precious metals expert.

Writing about the broad move by Asian nations to raise gold allocations, "The recent additions to the [South Korean] central bank's reserves could now suggest a more cautious approach to fiat currencies as a whole and the dollar in particular," says Rhona O'Connell, managing director of GFMS Analytics, now part of the Thomson-Reuters news group.

As a group, central banks opted to Buy Gold at a faster pace in 2011 than in any year since 1964 according to data compiled from International Monetary Fund statistics.

This contrasts with their net sales of a decade ago, when Europe's central banks sold down their "legacy" holdings from the Gold Standard era of a century before.

"Gold remains a primary mode of investment against inflation and political risk, carrying a long history as powerful, portable, anonymous wealth," says Rhona O'Connell.

"Is it likely therefore, in the face of increasing stresses, but specifically in this case to the Asian nations, that gold holdings will be increased?" she asks.

"The relatively small size of the market suggests that there is little point if the sole purpose is to make a tangible difference to currency risk".

Of those central banks Buying Gold in April, Mexico made the largest purchase according to IMF data, adding over 100 tonnes of gold. Russia was in second place with 87 tonnes.

"It is a matter of record that the official sector is building its gold reserves," says O'Connell. Thomson Reuters GFMS' latest Gold Survey identifies net central bank purchases of 455 tonnes in 2011.

China – the world's largest central bank by foreign exchange reserves – last reported a large-scale increase in its gold holdings in April 2009, taking its reserve to 1054 tonnes from 600 tonnes at the previous 2003 announcement.

India acquired 200 tonnes in November 2009, choosing to Buy Gold from disposals by the IMF, and increasing India's gold reserves by 56%.

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Robin Molinas is working as a research assistant at BullionVault, the No.1 gold and silver ownership service for private investors.

See the full archive of Robin Molinas articles.

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