Tag Archives: Foreign exchange reserves

Exploding Gold Demand In 2010

Demand for the most precious of metals just keep on rising. It’s really not a good sign, as gold traditionally is seen as an insurance against turbulent markets, natural catastrophes and wars. In 2010 the global demand for gold reached the highest in a decade, at 3.112,2 tonnes, worth about 159 billion USD, the World Gold Council reports. The price reached a new all-time-high at 1.421 dollar an ounce.

Emerging country banks are likely to continue purchasing gold as a means of preserving national wealth and promoting greater financial market stability.”

George Milling-Stanley


“As anticipated, 2010 was a great year for gold with demand strong across all sectors. The opening weeks of this year have been characterised by an East/West divide. The dip in the gold price in January resulted in a reduction of ETF tonnage and a decline in the net speculative long position on COMEX. This has been counterbalanced by very substantial physical demand flows in Asian markets,” Marcus Grubb, Managing Director at the World Gold Council says.

The shift in central bank activity was the result of two distinct market forces. Emerging market economies, experiencing rapid growth, have been large buyers of gold to diversify their external reserves.

Meanwhile, European central banks have virtually stopped sales in the wake of the financial and European sovereign debt crises.

The latest Gold Demand Trends report, released Friday, examines the impact of this development on the gold market in more detail.

“Emerging country banks are likely to continue purchasing gold as a means of preserving national wealth and promoting greater financial market stability. Any gold sales from advanced economies are unlikely to be significant as the official sector remains highly risk-averse. Collectively, the official sector is still a significant holder of gold. Central banks remain committed to its importance and relevance in maintaining stability and confidence as they have been for hundreds of years,” George Milling-Stanley, Managing Director, Government Affairs at the World Gold Council, says in a statement.

Here’s some of the highloghts of the report:

  • Gold demand in 2010 reached a 10 year high of 3,812.2 tonnes. Demand was up 9% year-on-year, and marginally above the previous peak of 2008 despite a 40% increase in the annual average price level between 2008 and 2010. In value terms, total annual gold demand surged 38% to a record of US$150 billion.
  • Jewellery demand was remarkably robust in the face of record prices in the majority of currencies. Annual demand for gold jewellery rose 17% from 1760.3 tonnes in 2009 to 2059.6 tonnes. The rise in annual average prices over the same period was 26%. In value terms, this resulted in record annual jewellery demand of US$81 billion.
  • Investment demand, comprising bar and coin demand, ETFs and similar products, but excluding OTC investment demand, remained stable in 2010, down just 2% from the exceptional levels seen in 2009. This equated to a 23% rise in value terms from US$43 billion in 2009 to US$52 billion in 2010. Physical bar demand was particularly strong during the year, recording an annual gain of 56% at 713.2 tonnes.
  • Demand for gold ETFs and similar products totalled 338.0 tonnes during 2010 or 9% of total demand. Although this was 45% below the 2009 peak of 617.1 tonnes, it was nevertheless the second highest annual figure on record. As at the end of 2010, total gold holdings in ETFs and similar products stood at 2,175 tonnes with a US$ value of $96 billion.
  • Demand for gold used in technology was 419.6 tonnes, 12.4% higher than in 2009 as the electronics segment fuelled recovery in the sector, with demand returning to long-term trend levels. Demand soared by 41% year-on-year in US$ terms to a record US$17 billion.
  • India was the strongest growth market in 2010. Total annual consumer demand of 963.1 tonnes registered growth of 66% relative to 2009, which was largely driven by the jewellery sector. In value terms this was worth US$38 billion.
  • China was the strongest market for investment demand growth. Annual demand for small bars and coins increased by 70% year-on-year, totalling 179.9 tonnes, which is worth approximately US$7 billion.
  • Total supply is estimated to have increased marginally, 2% higher year-on-year for the full year 2010, with a number of new projects across a range of countries and regions contributing to higher levels of mine supply. Within total supply, recycled gold, which accounts for 40%, fell 1% compared with the previous year to 1,653 tonnes.

The Gold Demand Trends report sets out the key factors that drove gold demand in 2010,but also provides an outlook for 2011.

This is the main trends:

  • The jewellery sector enjoyed a strong recovery in 2010, with annual demand 17% higher than in 2009. Asian consumers drove jewellery demand, particularly in China and India. Chinese demand is expected to continue to increase rapidly during 2011 as economic growth in China remains strong, while Indian gold jewellery demand is likely to remain resilient and grow.
  • Asian consumers led demand with the revival of the Indian market and strong momentum in Chinese gold demand, which together constituted 51% of total jewellery and investment demand during the year.
  • A structural shift in central bank policy towards gold meant that in 2010 central banks became net buyers of gold for the first time in 21 years, removing a significant source of supply to the market.
  • Investment demand was down 2% compared with 2009, but was the second highest year on record at 1,333 tonnes, which equated to US$52 billion. Investment demand for gold as a foundation asset in portfolios is likely to remain strong, fuelled by ongoing uncertainty surrounding global economic recovery and fiscal imbalances, as well as fear of impending inflationary pressures and currency tensions.

“As anticipated, 2010 was a great year for gold with demand strong across all sectors. The opening weeks of this year have been characterised by an East/West divide. The dip in the gold price in January resulted in a reduction of ETF tonnage and a decline in the net speculative long position on COMEX. This has been counterbalanced by very substantial physical demand flows in Asian markets,” Managing Director at WGC, Marcus Grubb,  says.

The shift in central bank activity was the result of two distinct market forces.

Emerging market economies, experiencing rapid growth, have been large buyers of gold to diversify their external reserves. Meanwhile, European central banks have virtually stopped sales in the wake of the financial and European sovereign debt crises, the report states.

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Here’s a copy of the full report.

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China To Dump Euro?

First Japan, now China. Two of the worlds largest savers are thinking about getting rid of their holdings in the troubled European currency. Just a few months ago, the mighty Asians announced plans to reduce their dollar reserves in favor of the euro. Now the tables have turned completely.

“This is a big strategic shift. Last year, the Chinese were trying to reduce their exposure to dollar assets by buying euro zone assets. This would be a complete reversal.”

Anonymous investor (Financial Times)


Representatives of China’s State Administration of Foreign Exchange, or SAFE, which manages the reserves under the country’s central bank, has been meeting with foreign bankers in Beijing in recent days to discuss a reduction of euro related assets in the nations foreign exchange reserves, the Financial Times reports.

We have already heard that Japanese investors – some of the worlds’ largest savers – have turned extremely negative on the euro.

Now it’s being reported that the Chinese officials of SAFE, the state administration of foreign exchange – who are the world’s largest investors – are evaluating their holding of euros.

China, which boasts the world’s largest foreign exchange reserves, is reviewing its holdings of euro zone debt in the wake of the crisis that has swept through the region’s bond markets, the Financial Times writes.

The importance of this news is not so much that it signifies a sudden short-term withdrawal of funds, but a long-term strategic shift.

70% per cent of China’s official reserves of $2.5 trillion are invested in dollar assets, and China had planned to re-balance this portfolio in favor of euros – which would have strengthened the euro’s global role.

The crisis has now reversed this trend – and put paid to any hopes that the euro could benefit from a stronger global role.

(By the way; the euro dropped below $1.22 on the news in Asian trading last night).

One investor says to Financial Times:

“This is a big strategic shift. Last year, the Chinese were trying to reduce their exposure to dollar assets by buying euro zone assets. This would be a complete reversal.”

A spokesman for SAFE refused to comment.

An estimated 70% of China’s foreign reserves are held in U.S. dollar securities, but the composition and management of the funds controlled by SAFE are regarded as state secrets.

However, analysts point out that SAFE rarely cuts its existing holdings significantly, due to the vast amount  of new money to invest every month.

Instead, it reduces the proportion of new investment devoted particular assets, and thereby reducing the weighting of that asset in its overall portfolio.

According to the latest figures announced by SAFE, the country’s foreign exchange reserves totaled almost 2,5 trillion dollar at the end of March, up by USD 174 billion in just six months.

Separately, a Chinese diplomat says he is “worried about” the effect of Europe’s debt crisis and the weakness of the euro on the global recovery and China’s country’s exports.

“The euro’s fluctuation will have an impact on China’s thinking, but it’s only one element” in any decision to allow the Chinese currency to rise vice foreign minister He Yafei  says, according to Bloomberg.

China’s official reserves have been growing at a rapid pace for years, driven by inflows of foreign capital, a large trade surplus and restrictive cross-border capital controls.

SAFE, which holds an estimated $630 billion of euro zone bonds in its reserves, has expressed concern about its exposure to the five so-called peripheral euro zone markets of Greece, Ireland, Italy, Portugal and Spain.

Any move by SAFE would mark a significant change in direction, as Beijing has been trying to diversify away from the US dollar in recent years by buying a greater proportion of assets denominated in other currencies.

The consequences of such action by Chinese authorities can only be imagined.

Market Snap Shots

Today’s movement in eur/usd illustrates more than anything else that investors are not sure what to believe.

However, after a short rally earlier Thursday, the RSI is now overbought, and a reaction down can be expected any time soon.

EUR/USD:

EUR/JPY:

Pretty much the same pattern in the eur/jpy relation.

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