Emerging market central banks the biggest official buyers of gold but will buy much more

Emerging market central banks have been the biggest official buyers of gold over the past year or so with total net central bank purchases the largest since 1964 last year at 445 tonnes. Central banks know that the only protection for their deposits against their own money printing is to buy gold.

But the emerging markets really get it. Russia added 15.5 tonnes in May raising its reserves to 911.3 tonnes, the highest since 1993; Thailand has almost doubled its reserves in two years; Mexico has bought over 100 tonnes since February 2011; and Turkey has stashed 123 tonnes since last October.

Rising gold purchases

Over the past 12 months net purchases of gold by the central banks have averaged 20 per cent of annual supply, according to the World Gold Council. Yet gold buying by central banks is most likely still not in top gear. Consider this chart from Casey Research:

You can certainly see how central banks have stopped selling and started to buy gold since the 2007-8 global financial crisis. But there is clearly far more room to go.

As Casey Research points out foreign exchange holdings have risen by 650 per cent to $10.4 trillion since 1980, a measure of the catch-up required for central bank gold buying. Indeed, you could say that this gap also shows how far gold needs to be revalued to match the expansion of the paper money supply since then.

Bigger picture

Diversification away from paper currencies makes sound economic sense in an age of money printing to prevent the global economy falling into a depression with falling prices. It is just a little ironic, though not surprising that the central banks printing the money are also buying gold for protection against the depreciation that they are causing by this action.

Individual investors would be well advised to take a leaf from the rule book of central banking and also diversify into gold as Egypt’s second richest man has just decided to do (click here). We don’t normally subscribe to the crowd theory of investing but this is one crowd we would follow.

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