November 25, 2020

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Central Banks Become Net Sellers of Gold To Finance COVID Spending Featured

 FT.com reports: Central banks flip to gold sales after record rally

Henry Sanderson in London AN HOUR AGO 2 Print this page Central banks became net sellers of gold in August for the first time in a year and a half, in the latest indication that demand for the metal is slowing following a record-setting rally.  Global central banks sold a net 12.3 tonnes of gold over the month, according to estimates published on Wednesday by the World Gold Council, an industry-backed body. The shift came just as the precious metal reached a record high above $2,070 a troy ounce in early August. It has since fallen more than 8 per cent to $1,890 per ounce. The latest data reflect the pullback of some major buyers as countries free up resources to deal with the coronavirus crisis. “All central banks around the world are facing a lot of pressure for liquidity,” said Bernard Dahdah, an analyst at Natixis in Paris. “Now is not the time to hoard gold, the hospitals need the money,” he said. Uzbekistan led the sales, exporting $5.8bn worth of gold in the first eight months of the year, according to government statistics. Central bank purchases have been a lesser factor in this year’s surge in gold, which has been dominated by record demand for gold-backed exchange traded funds. Global investors have poured more than $60bn into such ETFs so far in 2020. But central banks have still bought between 200 and 300 tonnes, according to the WGC’s estimates — worth about $13bn at the lower end, on current prices.

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Eurasianet reports: Uzbekistan pins economic fightback on gold sales

The State Statistics Committee revealed on September 21 that the country had exported $5.8 billion of gold in the first eight months of this year. That accounted for half of exports-based revenue.

Just to put that in context, Uzbekistan exported $4.9 billion worth of gold over the whole of 2019 – an amount that then accounted for 27.5 percent of trade turnover.

Uzbekistan became the world’s leading exporter of gold in July, easily outstripping Mongolia’s 6.1 tons with its 11.6 tons of sales. In August alone, it sold $2.5 billion worth of gold. Over the entire duration of 2015, it sold $1.9 billion worth of the metal.

... “The price of gold is at its peak, and economic activity has sunk to its nadir, so I think right now it is necessary to sell gold and foreign exchange reserves, and to use these funds to urgently save the economy from a further decline and to avoid more unemployment,” Nazirov (director of the Capital Markets Development Agency) said.

... Uzbekistan’s external debt burden has surged too. As of July 1, it stood at $17.3 billion, still only equivalent to what is generally deemed a highly manageable 30.3 percent of gross domestic product. It rose by $1.6 billion since the start of the year.

Uzbek economic expert Navruz Melibayev told Eurasianet that while gold is a lifesaver for Uzbekistan in how it generates revenue and helps bridge the trade deficit, reliance on it can only be a time-limited fix.

“We still need to develop industry and other spheres of the economy. Betting on the sale of gold is a temporary measure necessitated by the pandemic and rising prices for this metal,” he said.

The net sale of gold by central banks likely contributed greatly to, if not caused, the 8% drop in the price of gold - which has still risen 30$+ year over year. Of interest will be what happens next. Once the revenues from the gold sales have been used, there is no other ready source of liquid capital for many of the smaller and weaker nations, despite the fact that much of the world is going into a second phase of the COVID disease and related economic contractions. 
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With the gold reserves gone, what will the countries do to finance their COVID battle efforts? Well, this is what the world's leading economy has done since the pandemic started...

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They drove interest rates through the floor while spiking the money supply, which drove up the price of gold.  If we were to expand the time series a little, you will see just how egregious this monetary inflation has become....
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If I were a gambling man, I would wager the purchase of the gold form these central banks in need may be a worthwhile endeavor...

See what we have recommended central banks in highly inflationary countries do with their gold and our distributed tokenized gold system. It's almost as if we were able to predict this would happen (click a graphic to download and view).

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Last modified on Wednesday, 18 November 2020 06:13
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