Central banks boosted gold holdings in April


By Clementine Wallop and Rhiannon Hoyle
The Wall Street Journal
Monday, May 27, 2013


Russia, Kazakhstan, and Azerbaijan boosted their gold holdings in April, a month that saw prices plunge to two-year lows in a pullback that raised questions over the metal's safe-haven status but also offered an opportunity to buy into the market at lower levels.

The International Monetary Fund on Monday issued its monthly gold-buying report, which represents the activities of almost all central banks and is closely watched by gold investors, showing the three former Soviet republics increased their holdings by a cumulative 75% more in April than they did in March.

Official purchasing has provided important support for gold prices over the past few years. According to the World Gold Council, central bank buying represented 11.3% of all gold demand in the first quarter of this year.

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Gold prices shed as much as 17% in April and ended the month 7.5% lower. It is currently trading around $1,390 a troy ounce, down almost 12% since the start of the year.

Despite overall net buying, central bank activity was also an important factor in gold's plunge, especially the news April 10 that Cyprus was considering selling 10 tons of gold from its central bank reserves to raise cash. Cyprus' move to sell its gold stoked fears other debt-laden European nations—including Italy, which has the world's fourth-largest gold reserves—could follow suit.

The latest IMF report has been eagerly anticipated, as investors waited to see whether central banks would have shunned gold as prices fell, or if they would come into the market to buy. While it isn't clear when in April the banks purchased the metal, the buying activity signals some central banks' expectation that gold can hold its value over the long term.

"I think the news [of central bank buying] will help to steady the gold price decline," Beijing Antaike gold analyst Yvonne Wang said by telephone. "It shows that some people still have faith in gold."

Altogether, the IMF data shows central bank holdings rose 972,000 ounces last month. This much gold would have been worth some $1.5 billion at the beginning of April and $1.3 billion at the 27-month low of $1,321.50/oz reached April 16.

Central banks tend to buy slowly and hold gold over long periods rather than moving in and out of the market on a day-to-day basis, which helps buffer spot prices from their activity.

The data show Russia bought 269,000 troy ounces last month, taking its reserves to 31.8 million ounces. Kazakhstan added 85,000 ounces, bringing its stocks to 4 million ounces. The Republic of Azerbaijan bought 32,000 ounces, increasing its reserves to 129,000 ounces.

April marked the fourth consecutive month of purchases by Azerbaijan's central bank, which had no gold in its reserves in December.

Holdings at Turkey's central bank rose 586,000 ounces in April to 13.73 million ounces. It has started accepting gold as collateral from commercial banks, which analysts say is the main reason for recent increases rather than purchases.

Central banks in emerging-market countries have increased their holdings over the past few years in reaction to the sovereign-debt crises affecting reserve currencies like the U.S. dollar and the euro. This has helped shore up gold prices by absorbing supply.

While some central banks and many retail buyers have taken advantage of lower prices for physical metal, some investors remain wary of gold futures following six weeks of heightened volatility in the market.

Fund managers' short positions -- bets that the price will fall -- in gold were at a record 79,416 contracts in the week ended May 21, Commodity Futures Trading Commission data showed Friday.

Speculative investors added 1,454 long positions -- bets that prices will rise -- against 4,985 short positions, the CFTC said.

Given the large number of short positions and recent heavy liquidation from gold exchange-traded funds, gold has limited upside for now, according to Antaike's Ms. Wang.

"Gold is still lacking drivers that will push it higher," she said.

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