Tuesday, June 12, 2012

Reuters: Regulatory News: COLUMN-Do Asian central banks hold enough gold?

Reuters: Regulatory News
Reuters.com is your source for breaking news, business, financial and investing news, including personal finance and stocks. Reuters is the leading global provider of news, financial information and technology solutions to the world's media, financial institutions, businesses and individuals. // via fulltextrssfeed.com
COLUMN-Do Asian central banks hold enough gold?
Jun 12th 2012, 11:48

Tue Jun 12, 2012 7:48am EDT

  By Rhona O'Connell       LONDON, June 12 (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 en  route) 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 IMF  disposals (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.  
  • Link this
  • Share this
  • Digg this
  • Email
  • Reprints

You are receiving this email because you subscribed to this feed at blogtrottr.com.

If you no longer wish to receive these emails, you can unsubscribe from this feed, or manage all your subscriptions

0 comments:

Post a Comment

 
Great HTML Templates from easytemplates.com.