Emerging markets lead biggest central bank gold rush in 40 years

Written by The Financial Times | Updated: Nov 19 2011, 05:33am hrs
By Jack Farchy in London

Central banks made their largest purchases of gold in four decades in the third quarter after a sharp drop in prices in September spurred buying to diversify reserves.

The scale of the purchases, at 148.4 tonnes on a net basis, was far bigger than previously disclosed and puts central banks on track to buy more gold than at any time since the collapse of the Bretton Woods system 40 years ago, when the value of the dollar was last linked to gold.

Analysts said the buying, led by emerging market central banks intent on diversifying their foreign exchange reserves, helped explain the rebound in golds price from a low of $1,534 a troy ounce in September. Central bank buying tends to follow a different heartbeat than pure investment purchases of gold, said Marcus Grubb, head of investment at the World Gold Council. Its often based on targets set earlier in the year on gold as a proportion of foreign exchange reserves.

On Thursday, gold fell 2.5 per cent to $1,718 an ounce, following other commodities such as oil and copper lower.

The WGC, which published the data, declined to identify the banks behind the buying, saying only that a slew of new entrants emerged wishing to bolster gold holdings.

Countries that have disclosed purchases include Thailand, Russia and Bolivia.

Central banks are one of the most important drivers of the gold market. They became net buyers of gold last year after two decades of heavy selling - a reversal that has helped propel the price of bullion to a high of $1,920.30 a troy ounce, up 600 per cent in a decade. The last time central banks were net buyers of gold was in 1988.

Mr Grubb said most of the buying was after prices fell sharply to $1,534. He predicted that central bank gold buying for the full year could reach 450 tonnes, implying purchases of a further 90 tonnes in the fourth quarter.

The Financial Times Limited 2011