Central Banks Seen Retaining Gold as Debt Crisis Escalates

Central Banks to Retain Gold Amid Crisis
Gold rallied to a record this week as rising government debt burdens and weakening currencies boosted demand for a haven. Photographer: Guenter Schiffmann/Bloomberg

Central banks, net buyers of gold for the first time in a generation, are likely to retain their holdings even if they need to raise cash to counter an escalating debt crisis, according to Morgan Stanley.

“Once they’ve sold, that’s it, and buying back would be extremely expensive,” Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., said in an interview. “They would rather have the backing of a rising asset within their reserve portfolios than use it to reduce debt.”

Gold rallied to a record this week as rising government debt burdens and weakening currencies boosted demand for a haven. Central banks are the biggest gold holders, and Thailand, South Korea, Kazakhstan, Mexico and Russia added to reserves this year. The precious metal is the “currency of the world” amid the debt crisis, economist Dennis Gartman wrote Aug. 19.

“Under conditions of austerity we’re going to see a further deterioration of debt,” said Richardson, who has studied metals markets for 20 years. “Rising risk argues in favor of holding on to their gold reserves rather than selling them because they’ve only got one shot at selling.”

Immediate-delivery gold, which has rallied 30 percent this year, touched an all-time high of $1,913.50 per ounce yesterday and was at $1,846.07 by 12:02 p.m. in London. The metal may reach $2,000 by the end of the year, according to the median forecast in a Bloomberg survey of 13 traders and analysts at a conference in Kovalam in South India on Aug. 20.

Currency Credibility

“The European central banks won’t sell their gold because while it may be a means to raise cash, it definitely won’t be enough to settle their debts,” said Duan Shihua, head of corporate services at Haitong Futures Co., China’s largest brokerage by registered capital. “Besides, none of the central banks believe in the currencies of other countries.”

In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in purchases by countries including Bolivia and Mauritius, according to World Gold Council data. In the second quarter of 2011, central bank and government-institution buying rose almost fivefold to 69.4 tons, taking the first-half total to 192.3 tons, the council said last week. The banks will remain net buyers this year, it said.

Central banks have been “active buyers” of gold in recent months, Edel Tully, an analyst at UBS AG, wrote in a note to clients on Aug. 8. The banks should also buy platinum as they boost gold holdings amid concern about the global economy, Citigroup Inc. said in a report the same day.

Credit-Rating Downgrades

The debt crisis in Europe that started in Greece has hobbled economic growth and prompted downgrades of the credit ratings of Greece, Portugal and Ireland. Still, the euro has strengthened against the currencies of 14 of 16 trading partners this year as the European Central Bank bought government bonds.

German Chancellor Angela Merkel yesterday rejected a call by Labor Minister Ursula von der Leyen for states to put up gold as collateral for emergency loans. That disagreement may underscore risks over a second Greek aid package.

In August 2009, central banks in Europe agreed to a third five-year cap on gold sales. The European Central Bank and 18 others agreed to sell no more than a combined 400 tons a year through September 2014. Germany, Italy, France, the Netherlands, the European Central Bank, Portugal, Spain and Austria are among the top 20 holders, according to council data.

IMF Sales

“Notwithstanding the worst sovereign-debt crisis, particularly in Europe, where there are very large, concentrated holdings of gold, the central-bank agreement has been striking by the fact the only people who have been selling has been the IMF,” said Richardson, referring to the Washington-based International Monetary Fund.

The IMF sold 403.3 tons between October 2009 and December 2010 as part of a plan to shore up its finances and lend at reduced rates to low-income countries. More than half of that was acquired by central banks, according to the fund.

The Bank of Korea, which purchased 25 tons over a one-month period from June to July, said “holding gold helps reduce investment risks in terms of reserve management,” according to a statement earlier this month after the move was disclosed.

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