Lower prices could force some nations into buying gold as Dollar diversification returns to agenda...
at a slower pace than last year, central banks are set to "continue to support" prices into 2014, says a detailed analysis from French investment bank, wealth managers and bullion dealers Natixis
So-called "dynamic hedging" could see any further drop in gold prices force central banks into buying gold, says precious metals analyst Bernard Dahdah, to maintain the metal's share of their total foreign exchange reserves.
Writing in Natixis' latest Weekly Commodities, Dahdah notes that so far in 2013, central banks have been buying gold "at the slowest pace since the start of the financial crisis."
Gold buying by central banks as a group shows a drop of almost one third from 2012, according to separate data
compiled by market-development organization the World Gold Council, so far totalling 274 tonnes to the end of September.
"Not only has physical gold buying by central banks slowed down," Dahdah goes on, "but as events in Cyprus reminded us [in April]
central banks still have the ability to turn into a source of supply of gold."
The Cypriot central bank hasn't yet sold any of its small 14-tonne gold bullion
reserves. But proposals that it should, as part of the Eurozone member state's banking rescue package, were widely seen as weighing on the gold price as it began the first of two sharp price declines in spring 2013. Because, says Dahdah, "the market feared the implicit inference that other peripheral European countries which hold more significant amounts could also follow suit," pointing to Italy (2,452 tonnes) and Portugal (383 tonnes), the world's 3rd and 13th largest national central-bank gold holders respectively.
This year's "slightly softer pace" of buying gold, adds the World Gold Council in its latest Gold Demand Trends, "may have been driven by reduced demand for asset diversification from some central banks that have experienced a slower build up in foreign exchange reserves this year."
Looking at 2014, however, and noting the continued appetite for buying gold amongst emerging-market central banks, Dahdah says growing concerns over the value of US Dollars – the world's primary central-bank reserve asset – should continue to spur new demand.
Thanks to October's near-default by the United States amid its debt ceiling row and government shutdown, "the country has clearly lost some credibility," says Natixis' report.
"International holders of Dollar reserves may begin to revisit long-term plans to diversify away from the dollar into other currencies or gold," Dahdah writes.
"Furthermore, at lower gold prices central banks might find that they need to purchase additional amounts of gold to keep the share of gold as a portion of their total foreign exchange reserves on target" – a tactic known as "dynamic hedging".
Mid-year 2013 saw the proportion of world central-bank reserves allocated to gold slip below 10% for the first time since 2009. Western European institutions, who stopped selling gold during the financial crisis after trying to reduce gold's share of their foreign exchange reserves for almost two decades, now hold 56% of their reserves in gold bullion. By end-June, the so-called BRICS emerging economies (Brazil, Russia, India, China and South Africa) held 5.4% of their central-bank reserves in gold according to International Monetary Fund data. That was the lowest level since early 2010.
But Russia has since grown its gold reserves above 1,000 tonnes, rising to 7th place amongst the world's national central-bank holders by weight. China is widely suspected of buying gold for the People's Bank without so far updating its figures publicly since spring 2009.