I can remember back in 1999-2000 when the Bank of England was desperately trying to sell its gold at a 20+ year low. No one at the time wanted to own gold. Instead all the central banks wanted US treasuries. How times have changed. Now with gold at all time highs and the dollar near its lows, central banks are finally coming around to the idea of gold as a reserve asset. A recent report from the World Gold Council reported that central banks sold the least amount of gold last year since 1999. Can you imagine what will happen when central banks become net buyers of gold along with pension funds and other institutional investors. I read a piece somewhere which said gold only makes up 0.3% of pension fund assets. Eventually these types of investors will start allocating 5-10% of their assets to gold as a way of diversifying their portfolios. From Axcess News:
According to the World Gold Council (WGC), Central Banks and the International Monetary Fund sold fewer tons of gold last year than any previous period since 1999. Yesterday marked an end to their year and according to the latest WGC report, only 94.5 metric tons were sold in 2009.Black Swan Insights
Since the Central Banks Agreement took effect, Germany has 61 fewer tons of gold, yet with gold prices rising to record levels, in 2009 its gold reserves as a percentage of total reserve rose to 64% from 35.2% in 1999. France rose from 42.5% to 63.3% and Portugal jumped to 83.7% in 2009 from 39.9%.
The Central Banks Agreement was intended to stabilize the value of gold due to its monetary-backing against currencies. The Banks were concerned that if buying and selling wasn't coordinated it could destabilize gold and therefore currencies worldwide.
While countries such as Switzerland sold gold, reducing their tonnage from 2,590.2 in 1999 to 1,040.1 in 2009, other countries have been increasing their holdings. Venezuela has added gold to its holdings, buying bullion direct from mining companies as many other countries have done. In turn, while Central Banks are not accustomed to buying gold off the open market, buying from mining companies could shrink the supply of gold made available for sale. This could add to the price of gold heading into the fourth quarter of this year.
Goldman Sachs had forecast gold prices to reach as high as $1330 per ounce in the fourth quarter and StandardBank has held firmly to its belief that gold would trade in the $1300 per ounce range during the last four months of this year. But with news out that Central Banks have reduced their Agreement from a maximum allowed of 500 tons to 400 tons, it is setting the tone for a more bullish outlook on gold.