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Achara Deboonme

The Nation

Publication Date : 18-02-2013

Global gold demand is expected to remain brisk this year, given risks in various parts of the world, chiefly the United States and the eurozone, according to the World Gold Council.

In its report released recently, it said that despite the brighter global economic outlook, there are abundant risks. Given this situation, it expects gold to continue serving as a capital preserver during times of market stress as it tends to perform well when other assets are languishing, or when investors are anxious.

"Its role in this regard will transcend the economic fortune of any one country or region. In the long term, demand for gold is determined by a globally diverse set of drivers not least of which is economic expansion, as evidenced by the massive demand for gold in emerging-market economies," it said.

With a focus on high quality, liquid assets as desirable alternatives, gold is a natural destination for a proportion of these increased reserves. Some research papers have addressed the issue of gold's characteristics and benefits as a reserve asset, as well as optimal allocations for gold within a standard reserve asset portfolio. UBS in October forecast the gold price at US$1,900 this year.

Gold prices have been dropping recently due to better economic news from the US and China. Set for a rebound, the 17-nation eurozone posted a 2012 trade surplus of 81.8 billion euros, more than reversing a deficit of 15.7 billion euros in 2011.

At $1,628 on Friday, gold has fallen by $81.20 or 4.7 per cent in the past 12 months. Last week, billionaire investor George Soros cut his stake in exchange-traded products backed by gold last quarter as futures dropped the most in more than eight years. Soros Fund Management reduced its investment in the SPDR Gold Trust, the biggest fund backed by the metal, 55 per cent to 600,000 shares as of December 31 from three months earlier, a US Securities and Exchange Commission filing showed.

Yet, last year, despite a 6.7-per-cent decline in the last quarter from $1,776 an ounce to $1,657, global gold prices in 2012 showed an 8.3-per-cent increase in the year against 2011. This is the 12th straight annual gain for gold. This was a result of all-time-high global gold demand in 2012 at $236.4 billion, partly thanks to demand by central banks across the world.

"Central banks' move from net sellers of gold to net buyers that we have seen in recent years has |continued apace. The official |sector purchases across the world are now at their highest level in almost half a century," said Marcus Grubb, managing director for investment of the global organisation that tracks all kinds of gold demand.

At the end of the year, the US' gold reserves were the highest in volume, at 8,133.5 tonnes or 76 per cent of total reserves. Ranked 25th, Thailand sat on gold reserves of 152.4 tonnes, valued at 4 per cent of foreign reserves. Thailand's foreign reserves stood at $180.9 billion or 5.39 trillion baht ($180 billion).

Central banks garnered a greater share of gold demand in 2012, accounting for 12 per cent of the total compared with 10 per cent in 2011. Total net purchases by central banks of 534.6 tonnes exceeded 2011's already strong total and signalled a return to levels of buying last seen almost 50 years ago. In the fourth quarter alone, central banks bought 145 tonnes, the second highest quarterly total since the sector became a source of demand in the second quarter of 2009.

The year saw some joiners added to the list of institutions building their gold reserves. Brazil and Paraguay were two such names, both making significant purchases during the year.

Since first becoming a net purchaser in the second quarter of 2009, central banks have added almost 1,100 tonnes to global gold reserves, almost reversing the 1,143 tonnes of net sales conducted over the preceding three years. Global gold reserves, as measured by the IMF's International Financial Statistics, have steadily increased since the first quarter of 2009 and in November 2012, total world gold reserves were 31,597.6 tonnes, an increase of 6 per cent from the end of March 2009.

The list of countries actively adding to their official gold holdings remains heavily concentrated in developing markets, which partly reflects the scale of growth in the reserves of these markets over recent years. As the official reserves of these countries swell, with their heavy emphasis on dollar and euro-denominated assets, the need for diversification also increases.

In the year, Russia bought around 75 tonnes. Brazil and Paraguay made purchases of 34 tonnes and 7.5 tonnes, adding to the net 19 tonnes bought by Mexico as part of the continued reserve-building witnessed in the region. South Korea and the Philippines were again the dominant figures in Asia, adding 30 tonnes and 33.6 tonnes during the year.