One of the most notable trends in the World Gold Council's recently published Gold Demand Trends for the first quarter of 2015 is the fact that central banks have been net purchasers of gold for 17 quarters in a row.
Total central bank net purchases for the first quarter of 2015 were 119.4 metric tons. This is virtually unchanged from the net 119.8 metric tons bought in the first quarter of 2014 and it shows no signs of abating. Developing countries' central banks comprised the bulk of last quarter's purchases, with Russia's 30 metric tons leading the way. Belarus, Kazakhstan, Malaysia, and Mauritius rounded out the top five buyers.
Central banks usually buy gold to diversify their currency reserves. Those reserves traditionally have higher proportions of currencies from trading partners with that particular country. Like individual investors who buy gold to hedge against inflation, central banks buy gold to hedge against the potential volatility of those currencies.
And it looks like the risk of volatility of certain currencies is becoming greater as the global economy gets more wobbly. China appears to be headed toward a harder landing than predicted. The U.S. economy has had a spate of bad economic data. And Germany's economy looks like it is running out of steam while Greece is threatening the EU's fragile recovery.
Greater risk and volatility are the antithesis of a central bank's mission of stability. Diversification is one way to decrease instability and that is where gold shines, especially when compared with currency volatility.
But there is a growing disconnect between central banks, which see an increasingly unstable economic environment and thus a need to diversify into gold, and investors, whose interest in gold is slowly declining amidst the same uncertain economic environment.
There are several reasons for this. Many investors take the short view. And the Federal Reserve's accommodative monetary policies provide a big safety net. Meanwhile, by their very nature, central banks take a longer view and they do not have the luxury of a safety net.
Recently, the stock markets have been recording some record highs. But the trading volumes are relatively low. There is growing evidence that investors are cashing in and sitting on cash (and gold). That may be a sign that the long view of central banks is starting to converge with the short view of investors.
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