Tuesday, 16 February 2016 00:00

Why Central Banks Will Continue To Buy Gold?

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I had earlier written an article with the data on central banks accelerating gold purchase in the second half of 2015. This article will discuss the key reason why central banks of China, Russia and India will continue to buy gold in the coming years. I am focusing on China and Russia in particular as these two countries have been the most aggressive buyers of gold in the recent past.

The World Gold Council has published the demand trend for gold (2015) and that report provides data on official gold holdings as of December 2015. With countries looking at reserves diversification in times of global economic uncertainty, geo-political worries and currency war, it is very likely that demand for gold will sustain from central banks.

The chart below gives the official gold reserves as a percentage of total reserves for China, India, Japan and Russia.

Central Bank Gold Holdings As Percentage Of Reserves

 

It is important to note that for China, gold reserve as a percentage of total reserve is just 2% and I expect aggressive buying of gold by China to diversify currency holdings. China is my focus as the country has significant dollar holdings and there has been some bitterness in relations between China and the United States over the South China Sea issue.

With Russia getting involved in the Middle-East and with escalating tensions with NATO, I expect Russia to continue buying gold as a hard currency in uncertain times. While Japan also has low gold reserves, I don’t expect the country to be an aggressive purchaser of gold going by historical evidences.

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Chart Data Source: World Gold Council

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