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Central Banks Expected to Increase Gold Purchasing

Release Date: 
Thursday, March 14, 2013

Gold was higher in morning trading today up $2.10 at 9:42 a.m. Pacific Time on the New York Spot Market, at $1,590.80 per ounce.  Spot silver was $0.11 lower at $28.91 per ounce.  (Click here for the most current spot prices.)

Central banks are increasing purchases of gold, yen and the Chinese yuan to reduce their dollar and euro holdings, the World Gold Council (WGC) said.  Official sector holdings increased to more than $12 trillion in 2012 from $2 trillion in 2000, the WGC noted.

“Building gold reserves in tandem with new alternatives is an optimal strategy as central banks remain under-allocated to gold and many attractive alternatives are either too small or, as is the case with the renminbi [yuan], not yet open to broader international participation,” WGC’s manager for government affairs wrote. Central banks added 534.6 tons to their gold reserves in 2012, the most since 1964.

Central bank demand will continue to support gold prices, said Michael Lewis, global head of commodities research at Deutsche Bank.  “The public sector keeps buying," he said.

Robert Rennie, a chief strategist with Westpac Bank, said, better-than-expected U.S. retail sales data and a stronger U.S. dollar overnight may continue to weigh down gold prices, but "we still think it is a seasonal story and the seasonal headwinds become much more noticeable in the second quarter.”  According to Mr. Rennie, seasonal headwinds and fiscal issues will be supportive for gold prices.  "As we move through what felt like a seasonally boosted 1Q and into a seasonally hampered 2Q...that is something that clearly supports gold."

Deutche Bank notes long term threats to the broader economy.  “With continued confidence in the U.S. economy and a lack of apparent concern for the global economy in general, gold is struggling…” analysts at the bank said.  “While we see threats to the global financial system longer-term, the market is momentarily preoccupied with the next quarter rather than the next year.”

Phil Storer, director of trading at Dillion Gage Inc., said, “we are living in what could be a new and therefore frightening era that will generate much greater interest in the precious metals than we’ve seen so far.”  Storer said the price “congestion area” that gold and silver are in right now is probably going to be the launching pad for much higher metals prices and if he’s right, the market will soon see “the beginning of that upward bias quite soon.”

(Sources:  “Gold Slightly Lower in Asia; Precious Metals Await Fresh Cues,” Wall Street Journal, March 14, 2014; “Gold Prices Retreat On Brighter U.S. Data, Stronger Dollar,” Wall Street Journal, March 14, 2014; “Gold extends losses into a second day,” Marketwatch, March 14, 2013; “Central Banks Seen Buying More Gold, Yen, Renminbi to Diversify,” Bloomberg, March 13, 2013)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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