[R-G] Changes in Composition of Global Reserves

[Yoshie Furuhashi]

<http://www.ft.com/cms/072eff00-3a65-11de-8a2d-00144feabdc0.gif>

<http://www.ft.com/cms/s/0/39f51cbe-3a59-11de-8a2d-00144feabdc0,dwp_uuid=413b4c2e-b9f8-11dc-abcb-0000779fd2ac.html>
Central banks succumb again to bullion’s lure
By Javier Blas in London and Patti Waldmeir in Shanghai.
Published: May 6 2009 23:31 | Last updated: May 6 2009 23:31

Ten years ago on Wednesday the UK Treasury sent gold prices tumbling
when it announced it would sell a chunk of its gold reserves.

In a matter of weeks prices plunged to a 22-year low of $250 a troy
ounce and, over the course of that year, central banks from Australia
and Switzerland to the Netherlands announced plans to sell a large
slice of their bullion.

“There was a feeling that countries were racing each other to sell
their bullion,” says Jonathan Spall, director of commodities at
Barclays Capital in London and an expert on central banks’ gold
activity.

A decade later the picture looks different: sales in Europe have
slowed to a crawl and fresh demand is emerging elsewhere.

The clearest sign of the new trend is Beijing’s announcement that it
has secretively almost doubled its gold reserves to become the world’s
fifth-biggest holder of the metal. Central banks in countries
including Russia, Venezuela, Mexico and the Philippines are also
buying gold, albeit in small amounts.

GoldMeanwhile, bullion prices have bounced back, to trade close to an
all-time high of $900-$1,000 as concerns about the weakness of the US
dollar and the financial crisis have sent investors rushing to the
safety of the metal.

The change is partly the result of a natural end to Europe’s large
sales after years of strong disposals, says John Reade, a precious
metal strategist at UBS in London.

But it also reflects fresh interest from official sectors elsewhere.
“There is clear evidence among some emerging countries, notably Russia
and China, that they want to build up their gold reserves,” he says.

The shift is important for the gold market on two fronts: the interest
provides psychological support and, more importantly, has reduced a
source of supply. Last year central banks sold 246 tonnes, which,
although the lowest amount in 10 years, was equal to 10 per cent of
global mined gold.

China is expected to keep buying the metal quietly to diversify its
foreign reserves, gold industry sources in China believe. Beijing’s
exact gold purchasing intentions are not known, but industry analysts
are betting on more purchases, as it has made no secret of a wish to
diversify foreign reserves away from the dollar. Although gold is
quoted in dollars, its price usually rises when the US currency
weakens.

“I’m absolutely sure that they will continue buying because China’s
gold holdings are very small in terms of the size of its economy and
the growing significance of its currency,” says Paul Atherley,
managing director of Leyshon Resources in China.

China’s current gold reserves represent only about 1.6 per cent of
total foreign reserves, a vastly smaller percentage than the global
average of 10.5 per cent.

The financial crisis has also cast gold in a new light, even among the
European central banks who sold bullion. The Austrian central bank
says “the surge in gold prices and the concomitant depreciation of the
US dollar over the past few years have shown clearly how important
gold is as an instrument for portfolio diversification for a central
bank”.

Fortis Bank forecast this year the gold market is “on course for the
smallest net annual central bank sale for over a decade”. Last year
the eurozone central banks sold the lowest amount of gold since 1999
and bullion watchers forecast another low this year.

The proposed sale of 400 tonnes from the International Monetary Fund
could make up the shortfall, but central banks outside Europe were net
buyers in 2008 and could add upward pressure on official demand.

The last time the official sector was a net buyer of gold – albeit a
very small one – was in 1988. Large official purchases of gold – in
the hundreds of tonnes – have not been seen since 1965.

Philip Klapwijk, chairman of GFMS, the precious metal consultancy,
believes it is “extremely unlikely” that central banks will return to
the market on a large scale. He predicts that in coming years central
banks may shift between small net sales and net purchases. A new era
in the gold market has begun.

<http://www.ft.com/cms/s/0/433a92b4-3a67-11de-8a2d-00144feabdc0.html>
Gold sales cost Europe’s central banks $40bn
By Javier Blas in London
Published: May 6 2009 23:31 | Last updated: May 7 2009 08:55

The proportion of European reserves held as gold remains extremely
large even after years of sales, at an average of about 60 per cent,
compared with the world average of 10.5 per cent.