Gold Is Again A Central Bank Darling Amid Renewed Market Optimism

Central banks worldwide regained some confidence in gold as a reserve asset once more in July as buying by bank managers picked up modestly from recent lows, according to a UBS AG (VTX:UBSN) research note from Thursday.

“The 16.3-tonne net buying reported for July so far is already substantially higher than the previous month’s and is already about 59% of identified central bank buying in the second quarter,” wrote UBS gold analyst Joni Teves. A tonne is 1,000 kilograms, or about 2,200 pounds.

She cited news reports showing more active buying from longtime players like Russia and Azerbaijan, who boosted their gold reserves by 6.3 tonnes and 10 tonnes respectively in July.

This apparent recovery in central bank desire for gold, which will only be formally confirmed with official International Monetary Fund figures in September, coincides with a recent pickup in gold markets off of June lows.

Improved market sentiment in the third quarter is reassuring, wrote Teves.

“Gold’s relatively slow and steady movement provides a more attractive environment for the official sector to get involved, as opposed to the gapping price action of the previous quarter,” she said.

The World Gold Council estimated that official purchases of gold came in at 71.1 tonnes in the second quarter, of which about 60 percent could be from July sales.

Still, gold buying by central banks overall has been slower than in 2012, with total tonnage falling 35 percent for the first half of 2013.

In its latest update, the council lists weak emerging market currencies, volatile gold prices, and slowing growth of foreign exchange reserves as factors behind central bank demand slack this year.

It also notes that 2012’s second quarter hit records for central bank buying, as many countries sought to wean themselves from dependence on U.S. dollar reserves, making for difficult comparisons.

The council expects central banks to remain net buyers of gold for 2013, as they have been for the past three years.

In a note from Monday, Barclays PLC (LON:BARC) analysts said that the latest weekly European Central Bank data showed that euro zone banks kept gold holdings unchanged for the seventh straight week, as their appetite to sell stays muted.

Turkey and Kazakhstan added gold to their reserves in July, with Turkey adding an impressive 22.5 tonnes, wrote HSBC Holdings plc (LON:HSBA) analysts earlier this week.

“In August, gold prices continued to recover from the June lows and may have encouraged greater bullion buying by the central banks,” wrote the HSBC analysts. “However, gold’s recent price break of over $1,400/oz, an increase of nearly $240/oz since June, may potentially act as a curb to central bank’s gold appetite, in our view.”

One UBS strategist forecast that gold prices could rise to a crucial level of $1488 in coming days, retracing 50 percent of the value it's lostin recent weeks.

Political risks associated with Syrian intervention have significantly boosted gold prices recently.