During February and March of 2012 when Gold prices fell, which caused individuals to sit on the sidelines and watch the action, foreign central banks were doing quite the opposite. The Financial Times reported they were buying up as much as four tonnes of bullion. The acquisition, worth about $250 million at the time, was effected through the Bank for International Settlements (BIS).
Speculation is that the buyer is likely to be located in Asia, where the banks are anxious to balance out their dollar-heavy foreign exchange reserves from years of buying up U.S. debt. Last year the Philippines and Thailand were among the biggest buyers of gold.
This is not a new phenomenon. The central banks of emerging economies have been buying gold in quantity for the past several years. In 2011, central banks were net buyers of the yellow metal for a second year in a row. Countries like China and India have been among the leaders in recent years making large acquisitions of gold to increase their countries reserves. Yet China has another reason for moving away from paper and into gold, one with far reaching consequences. The Chinese know that any effort to globalize the RMB will not go far until it is seen as a trusted currency. One essential way to gain trust is to increase gold reserves.
The Financial Times reported that banks had acquired from four to six tonnes of gold in the over-the-counter physical market. Sources with knowledge of the trade indicated that buying had been very strong and that the total would probably be double the four to six tonne range. In a note to clients, Credit Suisse typified the action as “aggressive central bank buying.”
The recent purchases came when gold prices fell to tempting levels and if prices dip again we may see the central banks jump back into the market. Bullion had dropped 8 percent in the several preceding days before it saw the biggest one-day drop in more than three years. Apparently this was too much to resist for the big central banks.
According to the World Gold Council (WGC), central bank purchases climbed to 439.7 tonnes in 2011 in an effort to diversify their assets away from one or two foreign currencies, stabilize reserves and protect national wealth. Much of this strategy can be applied to individuals in their own financial circumstances as far as diversifying their assets, protecting their wealth, and moving away from a paper only portfolio.