WGC’s managing director of investment discusses the outlook for gold.
Marcus Grubb is the managing director of investment for the World Gold Council, where he leads both investment research and product innovation, as well as marketing efforts surrounding gold's role as an asset class. Grubb has more than 20 years' experience in global banking, including expertise in stocks, swaps and derivatives.
After the release of the World Gold Council's quarterly Gold Demand Trends survey, HardAssetsInvestor’s Sumit Roy spoke with Grubb to get more details on the particulars of some of the report's more surprising conclusions.
HardAssetsInvestor: Central-bank gold demand looked strong again last quarter and seems on pace to exceed last year’s five-decade high. Which central banks are buying? And what influences their purchase decision?
Marcus Grubb: Yes, absolutely. On the face of it, central-bank net purchases of gold fell 31 percent when compared with Q3 2011. But actually, 97.6 tons is a great number. And it means that through the end of September, this year is an even better year than last year; and last year was a record year. To the end of September, central banks have now bought 373.9 tons. Last year through September, they bought 343.9. So we’re looking at another 450-500-ton year for central banks, which is a record since the ’60s.
The most recent name that’s popped in, after many years of not buying gold, is Brazil. Brazil’s buying confirms a trend we’ve seen. If you look back over this year and in this quarter, the buyers are Latin American countries— Mexico, Bolivia, now Brazil; they are Central Asian countries— Russia, Kazakhstan, Ukraine; and Far Eastern countries such as Thailand, Philippines and South Korea. The developing country central banks are the ones doing the purchasing.
The interesting thing about them is, on average, their weightings to gold are much lower than the U.S. and European central banks— usually under 10 percent of foreign exchange reserves in gold. And, in many cases, less than 5.
The other conundrum to always keep in mind is that China has made no public statements about its gold reserves in three to four years. Ostensibly, they're still at 1064 tons, about 1.8 percent of foreign exchange reserves, which is extremely low, by international standards. But we don’t have any new data on China currently.
The bottom line is that these central banks are diversifying away from the dollar. And they are diversifying away from the euro because of the sovereign problems and the currency issues in Europe.
Moreover, they are diversifying away from sovereign debt. We’ve seen the sovereign debt issue raise its head last year in the U.S and of course in Europe we’ve got countries that are effectively insolvent, being propped up by bailouts.
With the “fiscal cliff” and the debt ceiling debate coming back in the U.S., it’s clear that sovereign debt is no longer the safe asset class it used to be for central bankers. Thus, they are seeking to buy more gold.