Please note that what follows are the musings of an independent analyst and do not constitute views from LBMA.
The World Gold Council’s (WGC) annual central bank survey, released at the end of May, throws up some interesting results, not just about gold, but pretty much as significantly about the dollar. Half of the central banks surveyed thought that the percentage of reserves in US dollars in five years’ time will be 40% to 50%. According to the IMF, at the start of the year, that percentage was 60%, down from 71% at the start of the century. So these two statements point to the continued move away from the dollar as geopolitics evolves, with it remaining dominant, but under some pressure.
The latest survey shows continuing friendliness towards gold in the official sector, although sentiment is not much changed from last year when, the Council estimates, net central bank buying globally amounted to 1,079 t. Although there is no direct implication that purchases will run at that rate this year, the Council avers that 24% of central banks intend to increase their holdings over the next 12 months and 62% expect that gold’s role in the official sector will increase over time.
BIS Numbers Clearly Show Gold’s Important Role in the Financial Sector
What is particularly interesting in this context is the report from the Bank for International Settlements, whose reported ‘gold and gold loans’ dropped from 923 t to 502 t over the year. The BIS’s Annual Report shows 102 t of gold within shareholders’ equity (21%) – that 102 t number has been steady for a number of years. BIS gold comprises gold bar assets in custody at central banks and sight accounts denominated in gold.
The BIS’s gold services include spot trading, swaps, outright forwards and options. Other gold services include sight accounts, fixed-term and dual currency deposits, as well as physical services, such as quality upgrading, refining, safekeeping and location exchanges.
These fluctuations relate to gold held on behalf of other organisations. They could be due to a mix of any of the above, although the notes to the BIS accounts clearly suggest that the majority was likely to be related to swap activity, stating that “Included in “Gold banking assets” is SDR 3,646.4 million (77 tonnes) of gold (2022: SDR 16,173.9 million; 358 tonnes) that the Bank holds in connection with gold swap contracts” – i.e. there was a drop of 281 t in the 12 months to the end of March. The pattern continued, with calendar 2022 holdings down by 422 t.
This may not all be related to swap activity, of course, but such activity would most likely be related to currency transactions, although the motivation behind each transaction is by definition not in the public domain. But there is at least one interesting historical precedent in reverse; for example, the Financial Times reported in July 2010 that in the wake of the Global Financial Crisis and the face of the Greek debt plus European banks’ funding problems, BIS’s reported gold rose substantially, in what transpired to be a collateralisation of dollar-loans from the BIS in order to aid liquidity. It is possible, therefore, that the reverse was taking place last year – with gold being swapped out in exchange for excess dollars in an effort to drain liquidity or to unwind previously distressed transactions. It may of course be something completely different, but these are chunky numbers and catch the eye.
Interestingly, the positions are on the rise again this year, with the Monthly Statement of Account implying an increase through to the end of May of 189 t, of which an implied 113 t was in January. With tighter credit conditions in some countries and the potential for further banking stresses, this is a parameter to be watched.
Source: Bank for International Settlements, StoneX