Do Asian central banks hold enough gold?
Most of these nations hold a low proportion of gold in their reserves, while they are among the countries with the highest personal gold use, at least when compared with local GDP
June 12, 2012 3:44 by Reuters
The Bank for International Settlements (BIS) noted in its June 2012 Quarterly Review that “central bank balance sheets in emerging Asia expanded rapidly over the past decade because of the unprecedented rise in foreign reserve assets”. Reserves rose from $1.1 trillion to $6.4 trillion in 2011. Most of these nations hold a low proportion of gold in their reserves, while they are among the countries with the highest personal gold use, at least when compared with local GDP. This may seem counterintuitive, but it is a result of history; long-standing industrialised nations were on the gold standard in parts of the 19th and 20th centuries and their central banks are still heavy with the metal while their populations have a variety of outlets for disposable income.
At current prices, for example, world official sector gold holdings, based on the figures reported by the IMF (these figures are for end-March, the latest available comprehensive numbers), represent 14 percent of gold+foreign exchange. China’s holdings are just 1.7 percent, and Indonesia’s gold accounts for 2.4 percent of total. France, by contrast, holds 84 percent of its reserves in gold and Spain, 34 percent.
EUROPE OVERWEIGHT, ASIA UNDERWEIGHT
The level of European reserves has prompted a number of suggestions during the Eurozone crisis that a portion of any Eurozone members’ central bank gold could be sold to reduce financial distress. This is effectively prohibited by European legislation, which enshrines the independence of the central banks as the custodians of reserves.
Sales specifically to help the fiscal position are thus not permitted, especially as it could compromise the independence of the central banks from political influence. Furthermore, even if it were permissible, the size of the gold market is such that no viable disposal could make any palpable difference to debt levels.
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? 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.
For China to raise its holdings to, say, 10 percent of combined foreign exchange (without dipping into its foreign exchange reserves so to do, and not affecting the gold price enroute) it would have to raise its gold holdings from the current reported level of 1,054 tonnes to 6,869 tonnes; an addition of 5,815 tonnes or the equivalent of more than two years’ global mine supply.Hardly viable.
GLOBAL OFFICIAL HOLDINGS ARE GROWING
It is a matter of record that the official sector is building its gold reserves. Thomson Reuters GFMS’ Gold Survey of 2012 identifies net central bank purchases of 455 tonnes in 2011, which was only the second increase since 1988 (the first was in 2010) and the largest since 1964. Central bankers remain concerned by the disproportionate level of dollars in reserves as well as fiat currency risk as a whole, intensified by the sovereign debt crisis in the Eurozone.
Recent official sector gold buyers have included Mexico (over 100 tonnes since February 2011) and Turkey (the increase in the latter’s reserves includes the acceptance of commercial banks’ gold into its reserves), while Russia has continued its uptake and Kazakhstan has been absorbing gold; indeed the Kazakh central bank was reported to have stated in early June that its gold holdings, of which it already has 100 tonnes, should account for 15 percent of reserves.
Calculations from the latest IMF figures suggest that Kazakh gold holdings were at 15 percent at end-April; this implies a steady monitoring of the position rather than sizeable future purchases.
And what of emerging Asian nations, where local demand is so strong in terms of gold per unit of GDP?
The first large-scale increase in reported holdings in recent years was the increase in China in April 2009, when reserves were reported at 1,054 tonnes, up from 600 tonnes.
India acquired 200 tonnes in November 2009 from the IMFdisposals (an increase of 56 percent in Indian gold reserves), while the Philippines continues to absorb a proportion of local production and Thailand has raised its holdings by more than 80 percent since mid-2010.
Possibly the most significant change, though, is that in South Korea. Although the tonnage involved is small, at just 40 tonnes since May 2009, it is an increase of 180 percent over the period. It still means that gold comprises just 1 percent of Korea’s total foreign exchange reserves, however.
To take gold to a weighting of 10 percent, would, at current prices, entail the absorption of 630 tonnes. A tall order, and not a policy that the South Korean central bank has espoused, but it is not beyond the stretch of imagination.
The lack of any notable increase in South Korean central bank gold holdings between 1998 (when more than 250 tonnes of local privately-held gold was mobilised and sold into the market in order to increase domestic liquidity during the Asian financial crisis) and 2010 suggests a phlegmatic attitude to renewed instability in the region.
The recent additions to the central bank’s reserves could now suggest a more cautious approach to fiat currencies as a whole and the dollar in particular, even though the tonnage involved is minimal.
INDIVIDUALS ARE STILL BUYERS
Meanwhile the local population in East Asia remains a high consumer of gold; while gold is now meeting competition for disposable income, it remains a primary mode of investment against inflation and political risk, carrying a long history as powerful, portable, anonymous wealth.
Furthermore, gold bars have swung firmly back into favour in Europe as a result of the Eurozone sovereign debt crisis, especially in Germany and Switzerland. This follows years of dishoarding that had been driven primarily by French heirs to old war chests, literally full of Napoléons, some of them.
Whether this change is permanent remains to be seen, but the fact that gold Exchange Traded Funds now hold almost as much gold as the Italian central bank (and slightly more than that of France), is telling. ETF gold is allocated and holders are therefore secured creditors of the vaulting bank, but some investors will continue to prefer to hold physical metal.