No rush for Asian central banks to follow India into the gold buying big leagues

Based on past experience, other major central banks in the region seemed unlikely to dramatically ratchet up offshore gold purchases anytime soon.

NEW DELHI/BEIJING (Reuters) - 

Asian central banks appear to be in little rush to follow India's lead and make big purchases of gold given its high market price and the availability of cheaper domestically-produced gold.

The relative illiquidity of gold, the small size of the gold market and difficulty buying in large quantities may also deter central banks from emulating the Reserve Bank of India, which last month bought 200 tonnes of gold from the International Monetary Fund at an average price of $1,045 an ounce.

India's deal, revealed this week, suprised markets, sent gold XAU= to record highs, and prompted speculation that other central banks would buy gold to diversify reserves in the face of a declining dollar, with China cited as an obvious buyer given its vast dollar holdings.

The IMF is selling another 200 tonnes of gold.

Central banks in Japan, South Korea and Australia have shown little recent inclination to buy gold overseas.

"We have no plans to buy gold ... We don't have a lot but we have enough," Bank of Thailand Governor Tarisa Watanagase told Reuters in an interview on Thursday.

"Gold is a secure asset but historical statistics show that, excluding its speculative side, it yields a low, long-term rate of returns from collateral fees," she said.

Even at $1,000 an ounce, all the gold bullion in the world is worth no more $1 trillion, or less than half China's $2.27 trillion in currency reserves, said Zhang Yuyan, who heads the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, the government's top think-tank.

"In addition, its liquidity is poor, it pays no interest and the cost of storage is high," Zhang told reporters on the sidelines of a forum organised by the Economic Information Daily.

When gold prices were low, there was talk that China would buy more gold, but it did not happen, he noted.

"From the point of view of diversifying FX reserves, you can spend part of your money on gold; but if you want to increase the share of gold significantly, especially when prices are so high -- it's unnecessary," Zhang said.

BUY LOCAL

China, the world's top producer and consumer of gold, is widely assumed to still be buying domestic gold production after revealing in April that it held 1,054 tonnes of gold, a jump of 76% from its last word on the subject six years earlier.

"It's cheaper for us to buy gold from the Chinese market, but it doesn't help diversify our huge foreign exchange reserves," said a senior Chinese central bank official, although one with no direct authority over gold buying.

"Having said that, I think China still should buy some IMF gold this time, and it might indeed do so, but it's unlikely to take all the 200 tonnes that are left as the price is obviously not particularly appealing," the official said.

"It would be a symbolic purchase, but better than nothing."

COLD ON GOLD

Based on past experience, other major central banks in the region seemed unlikely to dramatically ratchet up offshore gold purchases anytime soon.

South Korea's central bank holds just 0.03%of its total foreign reserves, the sixth largest in the world, in gold.

During a parliamentary audit last month, a few lawmakers proposed the Bank of Korea consider expanding gold purchases. But its governor, Lee Seong-tae, said it would not be easy practically for the bank to suddenly increase gold holdings because of the market impact.

Japan has kept its gold reserves steady at 24.6 million troy ounces since mid-2001. As of September, that was valued at $24.5 billion, or 2.3% of its total external reserves of over $1.05 trillion, which is the world's second largest after China.

Australia sold much of its gold reserves in 1997, noting then that there was little need for it to hold the metal given there was so much of it in the ground in Australia. Also, it has comparatively little in the way of reserves to diversify, A$43 billion ($39 billion), of which about A$2.9 billion is in gold.

Some central banks, however, are keen to accumulate gold.

The central bank governor for the island state of Sri Lanka told Reuters on Thursday his bank had been buying gold for the past 5 or 6 months and was continuing to do so.

"I believe many central banks for the past few months would have been embarking on a strategy of this nature, especially in volatile times," Sri Lanka Central Bank Governor Ajith Nivard Cabraal said.

"Many countries are today diversifying. They are also looking at intrinsic value of their reserves, so gold would be a natural candidate for that kind of reserve accumulation," he said.

Nick Brooks, head of research and investment strategy at ETF Securities in London, said India's purchase highlights the shift over the past year of central banks from being big sellers of gold to being net buyers.

"India is likely just the tip of the iceberg with China, Russia and other major emerging market central banks indicating their interest in building their holdings of gold as part of their diversification away from the U.S. dollar," he said.

"This appears to be a structural change that may support the gold price on a medium to longer term basis," he said. (US$=A$1.0988) (Additional reporting by Jan Harvey, Tom Miles, Suvashree Choudhary, Zhou Xin, Hideyuki Sano, Wayne Cole, Serajul Quadir, Choonsik Yoo, Orathai Sriring and Vithoon Amorn)

© Thomson Reuters 2009 All rights reserved

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter

Back