Gold as a worldwide percentage of foreign exchange reserves stands at 13%, a figure that is unchanged from the year 2000 as the quintupling in the price has kept pace with the rapid expansion of foreign exchange reserves from $2 trillion to $10 trillion

Demand for jewellery in 2010 rose by 17% in 2010 over 2009, and hit a record of US$81 billion. Total gold demand was at a ten-year high of 3,812 tonnes. Investment demand (excluding OTC activity) was down just 2% from the exceptional levels of 2009, and rose by 23% in US dollar terms. Physical bar demand was particularly strong.

The World Gold Council, in its latest edition of Gold Demand Trends (a quarterly publication using figures independently compiled by GFMS Ltd) describes how the central banks of some emerging market economies became large buyers of gold during 2010 and the Council expects this trend to continue. It suggests that this reflects a desire to preserve national wealth as well as promoting greater financial market stability. The Council also believes that further sales from "advanced economies" are unlikely to be significant in the near future because the official sector remains highly risk-averse.

After an average annual rate of sale of between 400 and 500 tonnes between 1989 and 2007, the Council notes, net central bank sales almost halved in 2008 and then declined to 30 tonnes in 2009. The in 2010 the sector was a net buyer of gold, the first time in 21 years. The Council identifies significant changes in behaviours in both the economies of Western Europe and North America (who typically hold over 40% of their total external reserves in gold, largely as a legacy of the gold standard) and developing countries (who average 5% or below with Asia at just 4%).

Emerging market economies with rapid economic expansion have been substantial gold buyers. The speedy increase in these countries' holdings of foreign exchange, notably the dollar, has eroded the proportion of reserves constituted by gold, and some of these nations are looking to restore the earlier balance.

European central banks, despite holding substantial quantities of gold in their foreign exchange reserves, have had their appetite for sales vastly reduced by the financial crisis and disposals have effectively dried up over the past three years.

Both these trends are expected to continue and as a result the official sector is not only unlikely to re-emerge as a "significant source of supply", but implicitly is expected to remain on the net demand side of the equation for the foreseeable future.

The Council notes that Russia acquired 135 tonnes in 2010 and suggests also that China may be continuing to buy local mine production (which in 2010 was 344 tonnes, according to GFMS figures); furthermore that the deputy head of the Central bank of the Russian Federation announced in January this year that the government plans to purchase at least 100 tonnes of gold each year in order to replenish its reserves. In 2010 gold comprised 5% of Russia's foreign exchange reserves; in 2000 it was as high as 25%.

Other emerging countries that bought gold last year included Thailand with 16 tonnes, Bangladesh with ten tonnes (the latter bought from the IMF). Venezuela increased its holdings by five tonnes and the Philippines showed net purchases of just less than two tonnes (although GFMS notes in a different publication that in the latter case this was a result of absorption of gold in the first part of the year and then the sale of much thereof later on).

In Europe, the average rate of sale from European central banks over the past ten years has been 388 tonnes, or roughly 10% of annual gold supply. Increasing prosperity in the 1990s followed by the establishment of the European Central Bank in 2000 and the creation of the euro area meant that European central banks had become less worried about systemic risk. As a result, the Council suggests, central bankers had been tending towards reserve management in order to maximise returns rather than the previously traditional defensive policy towards central banking operations. This led to gold sales programmes in order to fund increases in foreign currency reserves for rebalancing and investment purposes. The first Central Bank Gold Agreement was signed in late September 1999, limiting sales to 400 tonnes per annum; at the time the rationale for the announcement of the programme was to take some uncertainty out of the market, as in previous years there had been several announcements of "one-off" large-scale sales from individual central banks and this had unsettled market sentiment; this in turn had helped to drive prices down below $300/ounce.

After selling the full quota of 2,000 tonnes in the first five years, then 1,884 tonnes from a 2,500-tonne quota in the second five years, sales in the first 14 months of the third CBGA have amounted to just eight tonnes. This third programme, however, was designed to accommodate the sales from the IMF, of which 181 tonnes came into the open market and 222 tonnes went to other central banks, notably India with a tranche of 200 tonnes.

The Council concludes that the official sector is now highly risk-averse, that the public remains concerned about fiscal and monetary conditions, meaning that gold sales from advanced economies are likely to remain small. Emerging markets continue to build large reserves in order to provide them with security in the face of challenging market conditions. They are therefore expected to continue to purchase gold in order to preserve national wealth and enhance financial stability.


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