A Secret Plan To Buy Gold? What Central Banks Are Really Doing

Key Concepts

Central Bank Gold Activity: Purchases and sales of gold by central banks for their monetary reserves.
Monetary Reserves: Assets held by a central bank, typically in foreign currencies, gold, and special drawing rights, used to back its liabilities.
Transparency in Central Banking: The practice of central banks openly communicating their policies, decisions, and reserve holdings.
Bank for International Settlements (BIS): An international financial institution that fosters cooperation among central banks.
International Monetary Fund (IMF): An international organization that works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
European Central Bank (ECB): The central bank for the euro, one of the world's major currencies.
Soviet Gold Reserves: The gold holdings of the former Soviet Union.
Bank of England Gold Sales: The sale of a significant portion of the Bank of England's gold reserves in the early 2000s.
Public Auctions: A method of selling assets through open bidding.
Monetary Reserve vs. Other Government Holdings: The distinction between gold held as official monetary reserves and gold held by other government entities.

Market Overview and Price Outlook

The discussion begins with an overview of the current precious metals markets. Gold prices have been volatile, recently touching over $4,200 but subsequently falling sharply, breaking below $4,000. The speaker, Jeffrey Christian of CPM Group, expresses a short-term bearish outlook, suggesting prices could fall further to $3,900 or even $3,800. However, the longer-term outlook remains bullish, anticipating gold prices to eventually surpass $4,400 due to ongoing global economic, political, financial, and social issues.

Silver prices have also experienced a sharp decline, falling below $50 after reaching over $54. Similar to gold, silver is seen as vulnerable to further downside in the short term, with a similar timing for potential recovery as gold, possibly in the first few weeks of December. The long-term outlook for silver is also positive.

Platinum and palladium, considered more industrial metals, have also seen price increases followed by declines. The speaker anticipates their prices may fall in the near term, potentially before December, with platinum testing $1,300 and palladium around $1,200 or lower. This outlook is partly influenced by the expectation that upcoming economic data, potentially released after a government shutdown, will reveal economic weakness, rising unemployment, and higher inflation, which could negatively impact industrial metals.

Central Bank Gold Activity: Recent Trends and Transparency

A significant portion of the discussion focuses on central bank gold activity, particularly addressing recent articles in the Financial Times that question estimates of high, unreported central bank gold purchases.

Key Points on Recent Activity:

Net Purchases: In the first three quarters of the year (through September), approximately 22-23 countries have added gold to their monetary reserves, totaling about 8.3 million ounces.
Net Sales: During the same period, about half as many countries have sold gold, totaling approximately 2.5 million ounces.
Russia's Role: Russia has been a major source of gold sales, using its reserves to finance its government and war efforts. The speaker notes that other gold assets within the Russian government may not be being sold for this purpose, which is considered significant.
Annualized Net Change: The net change in central bank gold holdings for the first three quarters of the year is approximately 5.8 million ounces, annualizing to about 7.8 million ounces.

Shift Towards Transparency:

Historically, central banks were very secretive about their gold policies and other monetary operations. This secrecy began to change with figures like Paul Volcker and Alan Greenspan in the US.
The push for increased transparency intensified in the 1990s, leading up to the creation of the European Central Bank (ECB).
International agreements, organized through the Bank for International Settlements (BIS) and the International Monetary Fund (IMF), were established starting in the late 1990s and continuing into the mid-2010s. These agreements aimed to increase transparency by requiring central banks to report on their monetary reserve asset changes, including gold and currencies, on a monthly basis.
Most central banks are believed to continue adhering to these international agreements. Therefore, the idea of large, unreported secret purchases is seen as contradictory to the stated practices of the international central banking system.

Factors Influencing Central Bank Buying Behavior:

Price Sensitivity: Central banks, like many investors, tend to allocate a percentage of their monetary reserves to gold. As the price of gold rises, they purchase fewer ounces to maintain their target allocation. Conversely, they buy more ounces when prices are lower.
Waiting for Bargains: Central banks are observed to buy on dips, indicating a preference for acquiring gold at more favorable prices.
Historical Buying Patterns:
- From 2016-2018 and the first half of 2019, central banks bought gold when prices were between $1,200 and $1,350.
- When prices broke above $1,350 in mid-2019, several central banks, including the People's Bank of China (PBOC), stopped buying.
- The PBOC and other central banks did not buy gold as prices rose to $2,000 and then to a record $2,600 in early 2022.
- During the period from mid-2019 to November 2022, while prices were high, many central banks were not actively buying.
- When the gold price fell from $2,060 in Q1 2022 to $1,640 in early November 2022, central banks began buying again and importantly, started reporting these purchases.
- During the price decline in 2022, private entities and other groups in China sold gold, which contributed to depressing the price.
- By late 2022, with prices down 20% from their highs, central banks and other groups resumed buying.
- In 2022, approximately 10-11 million ounces were bought by central banks, mostly in the last two months.
- In 2023, about 14-15 million ounces were purchased.
- In 2024 (through September), purchases were around 8.8 million ounces, more than half of 2023's total.
- The annualized purchases through September of the current year are estimated at 7.8 million ounces.

Other Central Bank Gold Activities:

Market Making: Many central banks act as national market makers for gold, facilitating sales from producers and refiners to jewelers and investors. This can lead to confusion as these transactions are sometimes misconstrued as official reserve purchases.
Short-Term Trading: Some central banks engage in short-term gold trading for capital appreciation, typically using funds separate from their monetary reserves.

Case Study: China's Gold Holdings and Reporting

The speaker addresses rumors surrounding the People's Bank of China's (PBOC) gold purchases.

"Side Bucket" Gold: In 2022, approximately 10 million ounces of gold were sold by Chinese entities other than the PBOC. This gold could not find a ready home within China and was placed in a "side bucket" or trading account managed by the PBOC. This was not an official purchase for monetary reserves.
Double Counting: The speaker argues that counting this 10 million ounces as a purchase in 2022 and then counting it again when the PBOC buys it over the subsequent 15 months constitutes double counting.
PBOC's Role: The PBOC used to be the market maker for gold and silver in China but exited that business in 2022. However, they retained their trading desk to provide services to private and government Chinese groups.
China's Gold Policy: The Chinese government's policy is that "gold in China stays in China." This is cited as a reason why China would not agree to a gold-backed BRICS currency system, as they prefer to use dollars and other currencies for imports.
2023 Sales and Purchases: Over the course of 2023, the 10 million ounces from the "side bucket" were sold off. As prices rose, this gold was bought by private groups, other government agencies, and a significant portion was purchased by the PBOC and reported as additions to their monetary reserves.

Historical Central Bank Actions

Two historical examples are provided to illustrate central bank behavior with gold:

1. Soviet Gold Reserves:

CPM Group Estimates: In the 1980s, CPM Group estimated Soviet gold reserves peaked around 80 million ounces in the early 80s and were around 68 million ounces by 1988-1990.
IMF Membership and Reporting: In October 1991, the Soviet Union joined the IMF to secure international loans. Upon joining, countries must report their monetary reserves. The Soviet government reported 12.9 million ounces of gold.
Discrepancy: This reported figure was significantly lower than CPM Group's estimates. Soviet officials explained that 12.9 million ounces represented their monetary reserves of gold, and that large amounts of gold might be held by other parts of the Soviet government.
Dissolution and Distribution: After the Soviet Union dissolved in December 1991, the Russian Federation joined the IMF in June 1992. Other former Soviet republics also joined the IMF. When distributing the Soviet Union's gold, the Central Bank of Russia offered 12.9 million ounces on a pro-rata basis to the 15 republics.
Dispute over "Other Gold": The Ukrainian government, referencing reports of around 68 million ounces of gold in total Soviet government holdings, demanded a share of that larger amount, not just the 12.9 million ounces of monetary reserves. The Russian central bank stated that the share of "other gold" would require discussions with the Red Army.

2. Bank of England Gold Sales:

Decision to Sell: In 1999, the Bank of England announced its intention to sell about half of its gold reserves (approximately 10 million ounces) over a five-year period through public auctions.
Transparency Initiative: This sale was part of a broader move towards transparency in central banking. The Bank of England aimed to clearly communicate its intentions and the volume of gold being sold.
Timing and European Context: The decision to sell was made by the Bank of England between 1988 and 1993. The sales were scheduled to begin after January 1, 1999. This timing was strategic, as European central banks opting into the Euro system and the ECB had to report gold sales to the ECB after that date. Central banks not joining the ECB could sell gold secretly before January 1, 1999.
Gordon Brown's Role: Gordon Brown, as Chancellor of the Exchequer from 1997 to 2007, is often blamed for the gold sales. However, the decision to sell was made by the Bank of England five years before he took office. He implemented a decision made by his predecessors.
Swiss National Bank Parallel: The Swiss National Bank also planned to sell at least half of its 86 million ounces of gold, but also waited until 1999 to begin public auctions, similar to the Bank of England's approach.

Conclusion and Services

Jeffrey Christian concludes by emphasizing that the historical information discussed is now publicly available and can be found on CPM Group's website. He promotes CPM Group's services, including their yearbooks (gold, platinum, silver), monthly precious metals advisory subscriptions, consulting services, asset management, and commodity management. He invites interested parties to contact them via email at info@cpmgroup.com for further information or to discuss their historical data. He ends with a positive message, encouraging listeners to take care of themselves, those around them, and to do something good for the world.