Central banks moved from being net sellers to net buyers of gold in 2010. This big-picture trend marks a sea change.
Central banks had been dumping gold since the 1960s in an effort to suppress the price and to get out of a noninterest-bearing asset and into bonds and other assets that produce returns. Some central banks, including Australia’s and Canada’s, reduced their gold reserves to near zero.
The shift to net buying by central banks was driven by Russia and China, which together have purchased almost 4,000 tons of gold since 2009. In effect, developing economies were acquiring gold while developed economies were still reducing gold reserves or just staying even. That’s why this article comes as a shock.
Bloomberg reported that Germany increased its gold reserves in September by about 2.6 metric tonnes. This is not a huge amount (Russia buys about 30 metric tonnes per month), but the fact that Germany increased its reserves at all is big news. This is the first increase by Germany in 21 years.
Germany is the fourth-largest economy in the world, after the U.S., China and Japan. Its purchase breaks the mold of only developing economies buying gold. Now the developed economies are jumping into the pool.
There are several ways to interpret this move. Germany may simply want to diversify its holdings away from Treasuries and other sovereign debt. Germany may anticipate inflation in Europe and knows that gold is the best inflation hedge. Finally, Germany may see a global move away from U.S. dollar hegemony and could be hedging its bets.
None of these reasons are positive for the dollar. But they are all extremely bullish for gold.
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