Central Banks Buying Supports The Gold Price

A lot has happened in the financial world since 2008 – investors’ behavior has seen dramatic changes and shifts, trends have been turned upside down and confidence in financial markets has been significantly damaged. The effects of the crisis have been felt, almost without exception, across all markets. Gold and precious metals, typically flights to safety in moments of financial turbulence have as a result been on a bull trend over the same period. The post 2008 period saw investment demand soaring, as a result of investors losing their confidence in the financial markets and fears over inflation expected to result from Quantitative Easing stimulation measures taken by a number of major central banks, most notably the Federal Reserve. In the last few years another factor has become increasingly influential with.heavy buying by emerging markets’ central banks.

The official sector is now the most consistent buyer of gold with over 450 tonnes of the metal purchased last year, with a similar pattern being followed in 2012. And there is no reason to believe that this trend will change anytime soon. The percentage of reserves allocated to gold in developing economies, rather than foreign currency, is still well below the 10-15% standard for developed economies. With serious concerns over the stability of major currencies held, dollars and euro, due to Quantitative Easing, it is not unreasonable to assume there is a high likelihood that developing economies will continue to up the percentage of gold in their reserves.

!m[](/uploads/story/196/thumbs/pic1_inline.png)The interest from the emerging markets central banks is an important source of demand which has provided and continues to provide price support for gold. Since 2008 western central banks also virtually halted gold sales removing a significant source of supply onto the gold market. Over the previous decade most western central banks had been steadily reducing their gold holdings, representing a significant percentage of the gold supply on the market over that period. That is now no longer the case.

This week, gold price was at $1,589.40 per ounce a 0.4 percent increase from $1,582.40, while silver rose to $27.34 per ounce. Both gold and silver are significantly below their peaks, with 17.3 percent and 44.8 percent respectively.
Ups and downs are expected at this point with a general continuation of the post 2008 trend. Europe is in the midst of a huge debt crisis that’s been going on for almost three years now and the end of it doesn’t yet seem close. Quite to the contrary, the situation resembles the falling of dominos with Italy adding to the chaos already created by the economic troubles in Greece and Spain. And the situation in the U.S. isn’t encouraging either, with several indicators pointing to a new U.S. recession.

As a result, many forecasters predict a very positive picture for gold, including gold price reaching all-time record heights by the end of 2012 and 2013. The annual GFMS Gold Survey from Thomson Reuters suggest that renewed investor interest will result in a gold price as high as $1800 per ounce by the end of the year, and a new all-time peak to be reached in 2013. BNP Paribas’ analysts outline a similar picture with gold price should average around $1700 an ounce this year (meaning that the price will reach $1750 in the second half of the 2012). According to them the highest point for the price in 2013 will be at $1900 per ounce.
The most optimistic prognosis comes from Merrill Lynch which expects the $2000 mark to be reached by the end of the 2012, a price point which, in the latest Erste Group report, is seen as a beginning of a new phase for gold markets.