Central banks – the long-time nemesis of the gold sector – are
doing an about-face to become its biggest supporters. And this quantum shift
promises to gather momentum in 2010 with the prospect of a new era of net buying
continuing to fuel robust demand for bullion.
So say several of the world’s most prominent gold fund managers
and investment industry gurus. They include John Embry, a renowned, long-time
gold advocate and the chief investment strategist at Toronto-based Sprott Asset
Management, which runs the Sprott Gold and Precious Metals Fund.
“I think central banks will most certainly underpin the price of
gold next year,” Embry says.
In fact, he believes the advent of net central bank purchases of
gold is “virtually assured” in 2010 and beyond. Most notably, next year promises
to be the first in over two decades that central banks opt to buy more gold than
Embry’s prescient predictions in recent years about gold’s
inevitable ascendancy are not just being validated by jittery central bankers.
Since last year’s financial crisis, there has also been a buying frenzy among
many of the world’s multi-billion dollar hedge funds, as well as plenty of other
institutional investors and of course legions of individual speculators. All
have been buying in record amounts. And most are venturing into the gold sector
for the very first time.
Similarly, gold-backed Exchange Traded Funds (ETF’s) are
attracting ever-increasing numbers of rattled investors, who view gold as the
ultimate hedge against a weakening US dollar and continued instability in the US
economy. The prospect of a continuation of low interest rates for some time to
come is also adding to the yellow metal’s universal appeal.
Among the various other movers and shakers in the investment
industry who are boldly endorsing this new Gold Rush is London-based Evy Hambro,
who runs two of the world's largest commodities funds, BlackRock World Mining
Fund and the Gold & General Fund.
He too is also forecasting a paradigm shift in central bank gold
transactions in 2010, which he argues will provide bullion’s spot price with
continued support in its current trading range – in excess of the $1,000-mark.
"Gold's role is gathering a lot more attention in terms of risk
diversification," he adds with a quintessentially British penchant for
Another gold advocate who has his finger on the pulse of
Europe’s largest financial marketplace is Nick Brooks, head of research and
investment strategy at ETF Securities in London. He agrees that we are
witnessing a global paradigm shift. One where major sovereign investors
(state-owned investment funds), in particular, are increasingly hedging against
an ailing dollar in favor of bullion.
"India is likely just the tip of the iceberg with China, Russia
and other major emerging market central banks indicating their interest in
building their holdings of gold as part of their diversification away from the
U.S. dollar," Brooks says. "This appears to be a structural change that may
support the gold price on a medium to longer term basis."
That said, there still remains one big seller that continues to
cast a shadow over gold’s increasing luster – the International Monetary Fund (IMF).
It is still committed to its well-publicized goal of unloading a remaining 201.3
tonnes of gold to raise money for its lending activities. Originally, it had
over 400 tonnes to sell.
However, an announcement that India’s central bank bought 200
tonnes (6.43 million ounces) from the IMF at an average price of $1,045 an ounce
in late October was a defining moment for the gold market. It represents the
first overt move by a major central bank to aggressively diversify out of its
foreign-exchange currency reserves, especially US dollars.
It also gave gold a huge psychological boost by alleviating
concerns that the IMF would gradually ease its holdings onto the market and cap
gold’s price upside as the Bank of England did a decade ago. (Net sales by the
Bank of England and other European central banks were instrumental in depressing
bullion’s price in the late 1990s).
Now there is considerable speculation that other major buyers
will emerge among the world’s largest central banks to soak up the balance of
the IMF’s overhang on the market. Certainly China is among them. Its official
policy is to exchange a larger percentage of its $2.7 trillion in mostly US
dollar-denominated currency reserves for hard assets. China is already the
world's leading hoarder of gold, having revealed in April that it held 1,054
tonnes – a jump of 76% from its last official tally six years earlier.
Embry, who has been following the gold sector for over 30 years,
believes that Chinese officials must be keenly eyeing the remaining 200-plus
tonnes of gold that the IMF has up for grabs. Yet, he notes that Beijing has to
date proven to be a shrewd and “very clandestine” buyer that prefers not to
over-excite the gold market by signaling its intentions to speculators.
In fact, China’s central bank was positioning itself to try to
buy, at a discount, all of the gold that the IMF originally had for sale before
“India stole a march on everyone” with its brazen buying spree, Embry says.
He believes that the Chinese are therefore probably loathe to
paying a premium to India’s $1,045 average purchase price, especially since the
headline-grabbing trade fueled a parabolic rise in gold prices (around $170) in
November and early December before a pronounced pullback ensued.
Yet, there are plenty of other much smaller gold-hungry central
banks elsewhere in the world, especially in Asia, that may not wait to see if
gold drops much further before they act, Embry says.
“I think the rest of the IMF’s gold will be spoken for without
any difficulty…I expect somebody to come out of the woodwork, including the
Russians, who are continually adding to their reserves,” he adds.
Indeed, central bank officials the world over are waking up to
the fact that their predecessors acquired gold reserves in the first place to
stave off currency devaluations. And that impetus is once again taking on a
heightened importance against a backdrop of “continued economic and currency
uncertainty, and inflation concerns.” This is the conclusion of a recent report
by the London-based World Gold Council.
“In the official sector, we expect to see a continuing trend of
central banks diversifying their dollar exposure in favor of the proven store of
value represented by gold," the report adds.