by Steve St. Angelo, SRS Rocco Report:
There’s been a significant trend change in the gold market and it has the Western Central Banks worried. Before the collapse of the U.S. Investment Banking system in 2008, annual net physical gold investment was negligible. However, the present situation has changed considerably, putting severe stress on Western Central Bank policy makers.
Prior to 2008, many Central Banks (mostly Western) were net sellers of gold into the market. This official Central Bank policy was designed to keep the gold price from moving up higher. According to the figures from the World Gold Council, from 2003 to 2009, net sales of Central Bank gold totaled 2,846 metric tons (mt), or 91.5 million oz (Moz):
Central Bank gold sales peaked in 2005 at 663 mt and accounted for 21% of total demand that year. What would have been the market price of gold if the Central Banks didn’t dump 91.5 Moz over the seven-year period (2003-2009)?
Then something changed in 2010. As the United States and other Western Central Banks (Japan & then the EU) continued their massive QE (Quantitative Easing – money printing) policies, Eastern and various Central Banks became net buyers of gold.
Net Central Bank gold buying started at only 79 mt in 2010, surged to 625 mt in 2011 and is estimated to be 588 mt for 2015. Again, the majority of Central Bank gold purchases were from Eastern governments, especially in 2015. Russia and China accounted for majority of Central Bank gold purchases last year.
What a trend change… aye? From 2003-2009, Central Banks dumped 91.5 Moz of gold into the market. However, this totally reversed as Central Banks were net buyers, acquiring 94 Moz of gold from 2010-2015.
Net Physical Gold Investment Has Western Central Banks Worried
While Western Central Banks dumped gold onto the market to suppress the price, Eastern Central Banks are doing the opposite. Thus, Eastern Central Bank gold purchases have put more stress on “Net Physical Gold Investment.” I say physical gold investment as I have excluded changes in Global Gold ETF inventories. While Gold ETF’s are a gold investment vehicle, there is speculation that some (or a large percentage) of the Global Gold ETF inventories may be fictitious or oversubscribed. By the term oversubscribed… it refers to the notion that there are more than one owner for each ounce.
To get an idea just how significant the trend change of net physical gold investment has been over the past several years, I created the chart below:
Basically, I took total physical Gold Bar & Coin demand for the year, subtracted or added Central Bank net purchases and divided it by total demand. In 2003, total world Gold Bar & Coin demand was 304 mt and Central Bank gold sales were 620 mt for a net decline of total physical gold investment of 316 mt for the year. Thus, net physical gold investment for 2003 was a negative 12%. Which means, there was a 12% net disinvestment of physical gold in 2003.
I know this may sound a bit obtuse, but Central Bank gold sales are a liquidation of Central Bank reserves. Furthermore, most of this Central Bank gold sales were used to supplement the overall market including Jewelry, Bar-Coin and Technology demand.
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