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Developing world's central banks have plenty of room for gold

Section: Daily Dispatches

By James Campbell
Dow Jones Newswires
Tuesday, November 24, 2009

SINGAPORE -- Central banks of emerging markets have substantial scope to expand their gold reserves given their underweight position in the metal relative to developed market central banks, Stephen Jen, managing director of macroeconomics and forex at BlueGold Capital Management, said in a report dated Monday.

According to the report, the average gold holding ratio, or gold holdings as a percentage of total foreign exchange and gold reserves, of the U.S., Japan, ECB, UK, Germany, Italy, France, and Switzerland is 37.9% on average.

This compares with an average of 2.2% for a group that includes China, Russia, India, Taiwan, South Korea, Hong Kong, Brazil, and Singapore.

"The obvious implication is that the scope for emerging market central banks to buy more gold is substantial, if they decide to diversify into gold," said Jen.

Jen also said the top eight emerging market forex reserve holders have $4.1 trillion in foreign reserves, meaning every 1% reallocation in reserves towards gold would correspond to $41 billion in gold purchases.

"If these banks raise their gold holdings from the current 2.2% to a conservative 5%, this would correspond to $115 billion in gold purchases," he said.

The Reserve Bank of India's purchase of 200 metric tons of gold from the IMF, first reported Nov. 3, which cost it around $7 billion, has been one of the factors widely cited as driving gold to new record highs.

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