For 11 years – between 1999 and 2008 – central banks around the world were net sellers of gold. However in 2009 they stopped selling their gold and instead became net buyers, and as the chart below shows, central banks are continuing to accumulate gold in spite of, or perhaps because of, the lower price.
A 14 year chart of central bank net gold buying (Click on the chart for a larger version)
Chart courtesy of variantperception.com
While regular investors are concerned about the recent weakness in the US dollar price of gold, central banks are not.
Nations such as Brazil, China, Russia and Iraq are buying gold for a number of reasons. They are keen to diversify their international currency reserves away from US dollars, Euros, and Japanese Yen that are being rapidly debased thanks to quantitative easing (QE).
In December, for example, the National Bank of Ukraine announced that during 2012 it had increased its official gold reserves from 4.36% to 7.72%. The bank said it had boosted its gold reserves “to avoid the negative impact of the global crisis on the economic development of the country as it works on diversifying the components of international reserves…”
Last year Brazil purchased 17.2 metric tons of gold in October, and another 14.7 metric tons in November, doubling its holdings. Iraq also dramatically increased its gold holdings during 2012 lifting its official reserves from 5.8 metric tons to 31.07 metric tons.
During 2012 global central banks bought more gold than at any time in the past 50 years.
In addition to their desire to protect their nation’s wealth, central banks are buying gold because they understand gold’s historical role as money, and because they recognize the threat to paper currencies posed by record levels of public debt, currency wars, and inflation.