In 2014, the price of gold, expressed in US Dollars, went absolutely nowhere (even if its increase in RUB - not to mention many other rapidly devaluing currencies - was a stark surge of 83%). The reason: for the second year in a row, concentrated selling of "paper" gold which saw some 159 tonnes of outflows from gold-backed ETFs, primarily in the US. This however, is a substantial slowdown from the 880 tonnes of gold ETF outflows in 2013, selling which started in earnest when the price of gold peaked just shy of $2000 on September 6, 2011... the day the SNB instituted its now failed currency control attempt to set a 1.20 EURCHF floor.
Furthermore, ever since the SNB's stunning defeat in the currency wars one months ago (as noted above, the price of gold peaked hours before the SNB instituted its now defunct EURCHF floor in September 2011, and the result was an epic selling of gold-backed ETFs), sentiment expressed via paper gold has turned "tentatively positive" in the words of the World Gold Council, and so far in 2015, ETFs have seen inflows of around 60 tonnes, the vast majority (over 90%) of which has been into US-based funds.
And while one can debate just what was the net demand/supply for various other sectors such as jewelry, technology, and physical (not paper) gold investment, one thing is clear: central banks went on a shopping spree. According to the latest World Gold Council data, in 2014 the world's central banks went on a golden shopping binge to take advantage of the ongoing dumping in paper ETF gold, resulting in bank net purchases amounted to 477 tonnes over the past year, a 17% above 2013’s 409 tonnes. This was the second highest year of central bank net purchases for 50 years, coming second only to the 544 tonnes added to global gold reserves in 2012.
Who took the biggest advantage of the depressed gold price? One name sticks out: spot it on the chart below:
From the WGC:
Russia had by far the greatest appetite amongst those who raised gold reserves. The country accumulated an additional 173t (36% of total central bank demand in 2014) over a turbulent 12 months. 2014 was bookended by tension and uncertainty for the country: geopolitical antagonism with the Ukraine, and the resulting international sanctions, at the beginning of the year was followed by severe economic distress towards the end.
Kazakhstan (48t), Iraq (48t) and Azerbaijan (10t) were also notable for the size of purchases made. Fortification and diversification of reserves, namely away from the US dollar, continues to be the driving force behind this activity.
Who sold? Why the latest foreign-policy debacle for the US state department, of course: Ukraine.
While purchases continue unabated, sales remained insignificant. Ukraine was the only central bank to significantly decrease gold reserves, falling 44% to 24 tonnes, as well-documented geopolitical struggles impacted economic performance. Further, sales under the Central Bank Gold Agreement (CBGA) were minimal: the final year of the third agreement only saw 6.8 tonnes, while the first year of the fourth agreement8 has seen less than half a tonne sold thus far.
If that was all there was, Russia could actually be thankful to Ukraine for essentially transferring over its gold from Kiev to Moscow. But there is much more here than meets the eye, and the biggest wildcard remains as usual China. Because after its gold-buying splurge, Russia currently has - according to official data - more gold, 1,208.2 tonnes in its, and certainly not the NY Fed's vault - than China. The problem, is that China's gold holdings were last updated officially in early 2009.
And as everyone following the physical gold space knows, there are really just two key, outstanding questions:
- What is the updated total inventory of Chinese gold holdings (estimated to be somewhere between 3,000 and 6,000 or more tonnes), and
- Just what is the PBOC waiting for and when will it reveal this number
With global geopolitical events moving ever faster, and with "developed world" central banks increasingly losing control almost on a daily basis, China may have to answer both questions relatively soon.