iFund-Why do the Central Bank of China and Russia keep buying gold?

2019-04-15 07:14
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For long-term investors like Warren Buffett, gold is not a good investment. He says gold has two significant shortcomings, being neither of much use nor procreative. It is not hard to understand, if you compare the S&P 500 index with gold for decades.

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According to the World Gold Council, central banks bought 651.5 tons of gold in 2018. It is the largest net purchases since the termination of dollar-gold convertibility (see Figure 1). Last year, the net purchase of gold by Russian Central Bank was 274.3 tons, the highest amount by a single country on record. In fact, the Bank has been bought more than 200 tons of gold for four consecutive years. Russia’s gold reserves have increased for more than a decade (see Figure 2).

Figure 1: The amount of net purchases and net sales of gold by the central banks from 1971 to 2018 (tonnes)

Source: World Gold Council

Figure 2: The change in Russian central bank’s gold reserves and US bond holdings from 2007 to 2018

Source: World Gold Council

Despite the weak data shown in recent months, the People’s Bank of China (PBoC) still buys gold. From December last year to March this year, the PBoC bought 42.9 tons of gold, bringing the gold reserves in March to 60.62 million ounces. It is worth noting that the last purchase of this precious metal from the PBoC on a large scale occurred between mid-2015 and October 2016, i.e. another period of economic slowdown. As China is the world’s largest gold producer and consumer, PBoC’s actions are essential for the gold market.

The main reason behind the central banks’ actions is to lower the US exposure and have a more diversified portfolio. Because of the limited investment options for the banks, gold becomes a popular choice. It is consistent with the recent World Gold Council survey. According to the survey, 76% of central banks treat gold as a safe-haven asset, while 59 percent of central banks believe that gold can effectively diversify their portfolios.

Equity will outperform Gold in long terms

As market expects there will be no rate hike this year, the strong dollar has lost its catalyst. Meanwhile, the central banks have been buying gold, making some views optimistic on the gold prices. Is it a good investment opportunity? It depends on your investment horizons. For long-term investors like Warren Buffett, gold is not a good investment. He says gold has two significant shortcomings, being neither of much use nor procreative. It is not hard to understand, if you compare the S&P 500 index with gold for decades.

Funds related to US Equities

BlackRock Global Funds – World Gold Fund A2 Acc EUR

Investec Global Strategy Fund – Global Gold Fund A Acc Gross USD

Amundi Funds Equity Global Gold Mines A2U Acc USD

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