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Stock Strategist

Are Central Banks Moving the Gold Market?

Their purchases hold the key to understanding demand and pricing.

Central bank purchases, particularly from the official sector in emerging economies, have been the largest single driver of higher gold prices during the past five years. This development is particularly notable as central banks had been net sellers of bullion since the 1980s. We believe central banks from emerging economies have been buying gold to diversify their foreign exchange reserves, while developed Western countries with large legacy bullion holdings now see gold as a strategic reserve asset and have accordingly halted their gold sales programs. We think gold holds particular appeal for countries with large U.S. dollar holdings, such as China and OPEC member nations, given gold's historically negative correlation to the greenback. We do not believe central bank buying can maintain its current pace over the long haul, which supports our lower long-term gold price forecast of $1,200 per ounce. Still, we see a number of potential scenarios regarding official sector gold demand over the next several years, some of which contemplate accelerated central bank purchases, that could be very bullish for gold prices in the near to intermediate term.

While the spectacular rise in gold prices over the past decade was aided by many forces, we think the biggest single driver has been increased central bank purchases. Before 2010, central banks were major suppliers of gold on a net basis, selling on average more than 400 tons of gold per year between 2000 and 2009. But 2010 marked the first year in which central banks around the world were net purchasers of gold, buying 87 tons of gold that year, and the trend accelerated in 2011 with official sector demand climbing to 440 tons. Global gold demand increased from 3,800 tons in 2000 to 4,067 tons in 2011.