No full stops for central banks' gold race

In October this year, Reserve bank of India triggered a new wave among central banks across the globe, resulting in huge purchases of gold by them. With India leading the way with a 200 tonne gold purchase from the International Monetary Fund (IMF), other banks also followed suit by purchasing the yellow metal in bulk.

Now, to add to that in 2009 European Central Bank (ECB) has decided to downsize its annual gold sale to 155 tonne. This move has further boosted the central banks' crave for the yellow metal. Before this, Sri Lanka and Russia had purchased gold through their central banks.

This move will also help boost gold prices in international markets. During the past 10 years, the ECB used to dispose of 400-500 tonnes of gold every year.

With all the central banks going for gold, a tendency has evolved among central banks of many countries to hold a major portion of their reserves in gold. The emergence of new net buyers is expected to add strength to the bullish trend in the metal. China had acquired 450 tonnes, India 200 tonnes and Russia 120 tonnes from the International Monetary Fund this year.

The US government holds 8,133 tonnes of gold, the Euro Zone 10,800 tonnes and the IMF about 3,000 tonnes. Governments across the world own close to 30,000 tonnes.

While the ECB has a high gold reserve, many emerging economies have very low stocks or no gold at all.

In 2009, investment demand almost made up for the weakness in jewellery and industrial demand as investors bought large quantities of coins and bars, besides exchange traded funds and other products.

Even if other central banks don't start making large purchases like India's, they will likely remain a substantial buyer as reserves continue to pile up. In the 12 months through November, the banks added around $800 billion to their foreign-exchange holdings, a side effect of their efforts to slow the appreciation of local currencies.

China, which has seen its reserves rise by more than 50% in the past two years to about $2.3 trillion, has bought 450 tonnes of gold during the period.

That is a substantial chunk in a market where annual turnover is about 3,800 tonnes. Accumulation of reserves by Asia's central banks will likely continue as long as strong regional growth and high interest rates continue to attract foreign investors.

A shift in portfolios, like India's, would only add to this, and there is scope for this to happen. Gold accounts for around 2% of reserves in emerging markets. That compares with a 10% average globally, and more than half of all holdings in the case of the US Federal Reserve, and France's and Germany's central banks.

Asia's central bankers will move slowly, particularly with gold prices still above $1,000 an ounce. But a shift toward the global average would mean more buying - regardless of what the dollar does.

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