August 2013

official sector activities

h1 2013

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TABLE OF CONTENTS
Key Points

Introduction 4
Sales & Purchases by Country

Gold Lending Market

Outlook for Central Bank Activity in the Gold Market

Focus Box: Heavy CBGA Sales Unlikely in the Short Term

Appendix 10

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h1 2013

Key points

Background Information

Net official sector purchases dropped by 35% to

181 tonnes in the first half of 2013.

Largely because gold was the basis of monetary

systems since as far back as the early part of the 18th
century, it has continued to comprise a significant
portion of the official reserves of central banks
around the world (just over 11% at end-June 2013).
According to Thomson Reuters GFMS data, these
holdings accounted for just over 17% of total aboveground stocks of gold at end-June 2013. The figure is
equivalent to almost 12 years global mine production at
current levels.

The decline was a result of a slowdown in gold

purchases from developing countries.
By contrast, gross official sector sales remained
tiny in the first half, as signatories to the Central
Bank Gold Agreement (CBGA) once again were
absent from the market.
Net central bank buying is expected to remain
steady in the second half of this year, with the full
year total likely to reach around 350 tonnes.
Short-term leasing rates surged following the
price crash in mid-April, although this was not
sufficient to encourage a major rebound in gold
lending from the official sector.

Introduction
Thomson Reuters GFMS estimates of the impact
of official sector activity on the gold market are
based on a combination of publicly available data
and information collected through field research. As
there is often a lag between central bank activity in
the gold market taking place and this activity being
identified, so our estimates may be revised in future
updates. Data in this report should therefore be
viewed with this caveat in mind.
After a rapid expansion of buy-side interest in recent
years, the pace of gold acquisitions from central
banks moderated in the first half of 2013. At the
moment, our estimate shows that net official sector
purchases slowed to 181 tonnes over the six-month
timeframe, down by 35% year-on-year. That said,
it should be stressed that the absolute total was still
elevated by historical standards, especially taking
into the fact that the official sector was a persistent
net seller in the gold market over 1989-2009.
The developing world continued to dominate
the market, accounting for nearly 90% of gross
purchases over the first half of 2013. Among the
drivers behind this apparent appetite for the yellow
metal, the key driving force remained the desire
by emerging nations to diversify their huge foreign
exchange reserves. Given a lack of sufficient

The importance of official sector activity to the gold

market and to the price of the metal is therefore selfevident. Moreover, history provides the evidence to
support this. First of all, the shift of the official sector
from a broadly neutral position in the 1970s and 1980s
to substantial net sales in the 1990s and 2000s was
a factor (among others) that resulted in gold prices
falling well below the $300 mark in the late 1990s.
Furthermore, the sharp rise in central bank lending over
the 1990s provided the liquidity required by producers
to establish hedge positions in gold, in a decade when
net producer hedging accounted for over 6% of annual
gold supply.
In recent years, however, the anti-gold climate that
was prevalent throughout the 1990s and in the early
part of the 2000s has come to an end. Following a
considerable decline in net central bank sales in 2008
and 2009, the official sector shifted back to the demand
side of the gold market in 2010 (a case last seen in
1988), with net purchases estimated to have risen to a
48-year high of 544 tonnes in 2012. This was boosted
particularly by the prolonged period of US dollar
weakness, the worsening sovereign debt situation in
developed countries and golds impressive performance
over the previous decade.

above-ground stocks of gold

Above-ground Stocks, end-June 2013 = 175,500t

Private
(

Jewellery
(85,100t)

Unaccounted
(3,600t)
Other Fabrication
(21,400t)
Private Investment*
(35,200t)
*Includes bar investment, implied net investment and coins
** Excluding gold lent or supplied

Source: Thomson Reuters GFMS

Official Holdings**
(30,300t)

h1 2013

improvements in fiscal consolidation and the

persistence of highly accommodative monetary
policies in many advanced economies, it is not
surprising that some developing countries opted to
convert a small portion of their reserves into gold.
that said, it is interesting to note that the pace
of official purchases from the developing world
slowed notably in the first half of this year. To a
large extent, this was due to golds disappointing
price performance and a sharp rise in volatility in
the second quarter. although price is not the key
issue regarding an institutions decision to augment
its gold reserves, for some potential buyers this
consideration may well affect the timing of any such
purchases. this helps to explain a sharp fall in
open-market purchases by the official sector yearto-date. By contrast, purchases in the domestic
market via acquisitions of local mine production and/
or scrap, such as those seen in the last couple of
years, remained steady in the first half of 2013.
At the same time, the still high net purchase figure
was also underpinned by the continued absence of
major disposals from signatories to the central Bank
Gold agreement (cBGa), with sales from the group
amounting to less than one tonne.
The official sector also exerted significant influence
on the price year-to-date. in particular, the trigger
for the price crash in mid-april was the news that the
european commission had suggested that cyprus
sell gold reserves to raise 400 million euros. While
the countrys gold holdings (14 tonnes) are small,
this raised growing doubts about the independence
of central banks and, more importantly, fears about
possible sales from other struggling european
countries where gold reserves are substantial.
cBGa aNd otHer PUrcHases & sales

150

CBGA*

sales
gross sales from the official sector remained trivial
in the first half of 2013, with volumes amounting
to no more than three tonnes. this in part should
be attributed to the ongoing absence of sales
from signatories to the cBGa. as the end of the
penultimate year of the third cBGa approaches,
sales are set once again massively to undershoot
their 400-tonne annual quota. in addition, as the
gold price suffered from hefty losses in the first six
months of the year, opportunistic sales from certain
countries also seem to have receded. as such,
the bulk of gross sales was comprised of marginal
disposals from a limited number of countries where
sales of gold bullion seem to have been related to
coin minting programmes.

PUrcHases
gross purchases from central banks are estimated
to have totalled 183 tonnes in the first six months
of 2013. While the figure was down by almost 40%
on a year-on-year basis, it should be stressed that
this was against an exceptionally high base in 2012
and the absolute level in both quarters of this year
remained well in excess of that seen in the 1990s
and 2000s. the major decline, therefore, was by no
means a collapse in appetite for gold from the official
sector year-to-date.
Before looking at country-by-country breakdown, it
is important to emphasise that our gross figure does
Net official sector PUrcHases & sales
Ch3 Retail investment

Ch3 Retail investment

200

sales & PUrcHases

BY coUNtrY

600
Net Purchases

400

IMF on-market sales

Rest of World**

Net Purchases

200
Tonnes

Tonnes

100
50
0
-50

-200
-400
Net Sales

Net Sales

-100
Q1-08
Q1-09
Q1-10
Q1-11
Q1-12
Source: Thomson Reuters GFMS, IMF
*signatories to the Central Bank Gold Agreements
** all other countries

-600
-800
Q1-13

2002
2004
2006
Source: Thomson Reuters GFMS, IMF

2008

2010

2012

h1 2013

not include the 82-tonne net increase in Turkish

official gold holdings. As we have discussed in
previous reports, this rise has been related to a
change in the countrys legislation in late 2011,
which has since allowed local commercial banks
to deposit their gold holdings at the central banks
account in order to exchange for Turkish lira liquidity.
Turning to announced purchasers within the official
sector, Russia once again was the largest buyer,
lifting its gold holdings by another 39 tonnes over
the first half of the year. Consistent with the trend
from previous years, these gold reserves were
accumulated via a series of regular acquisitions
of local mine production. By end-June 2013,
the countrys official gold holdings amounted to
996tonnes, accounting for 7.4% of its international
reserves at the market price.
Buy-side interest was also apparent from a number
of other CIS countries. Kazakhstan bought almost
16 tonnes of gold in the first half of the year,
through regular purchases of domestic gold output.
Azerbaijan reported an eight-tonne increase in
its gold reserves over the same period. These
purchases were made by the countrys sovereign
wealth fund, SOFAZ, which is allowed to investment
up to 5% of its investment portfolio in gold.
Elsewhere, modest purchases were also reported by
Ukraine, Belarus and Tajikistan, who collectively
bought four tonnes in the first half.
South Korea raised its bullion holdings by 20 tonnes
in March. Since the country made its first purchase
for more than a decade in mid-2011, it had already
lifted its gold reserves by 90 tonnes to 104 tonnes
by end-May, although the metals share of total
international reserves remained trivial at 1.4%.
Gold & other reserves
at end-June 2013
100

Other

60

40

Yuan/gramme

% of total reserves

80

Gold

20

USA
CBGA
Source: Thomson Reuters GFMS

China

Other

World

The balance of central bank buying in the public

domain consisted of small gains in gold reserves in
a handful of countries. The overwhelming majority
of these purchases were made by Asian countries,
including a six-tonne increase in Nepals gold
reserves and a rise of fewer than two tonnes from
a few countries including Mongolia, Brunei and
Indonesia.
Apart from the aforementioned buyers, over 40% of
gross purchases or some 70 tonnes were accounted
for by undeclared transactions, details of which
cannot be released in respect of confidentiality. In
some cases, gold was added quietly in the local
market via purchases of mine production and/or
scrap. While this amount was somewhat smaller
than that seen in the previous year, it should be
viewed within in the context of the exceptionally
high price volatility in the gold market in the first half
of this year. It is not surprising that certain reserve
managers decided to postpone their purchases to
avoid short-term market volatility.

top 20 Forex holders

(Country)
US$ bn
Gold as of
Total Reserves
China, P.R.: Mainland
3,442.6
1.5%
Japan
1,176.3
2.4%
Saudi Arabia
677.6
2.1%
Switzerland
463.6
9.0%
Russia
462.1
7.4%
Taiwan
406.6
3.8%
Brazil
359.6
0.7%
South Korea
317.4
1.4%
China, P.R.: Hong Kong
305.6
0.0%
Singapore
255.9
2.2%
India
255.3
7.5%
Algeria
189.2
3.9%
Thailand
162.5
3.4%
Mexico
157.4
2.8%
Malaysia
131.9
1.0%
Libya
116.8
4.2%
Turkey
103.9
13.8%
Poland
100.1
3.7%
Indonesia
98.4
3.7%
Denmark
78.7
3.0%
Source: Thomson Reuters GFMS

h1 2013

nET PRODUCER (dE-)HEDGING

Gold Lending
market

50

Such a notable rebound in borrowing costs yearto-date was partly driven by a surge in physical
demand since mid-April. As mine production
remained steady and scrap plunged, the shortage
of physical gold and rising premia in many regional
markets provided a strong incentive to borrow
gold. Also of importance though has been a rapid
expansion of short positions in recent months which
also raised investor demand for borrowed gold.
Nevertheless, despite a decent recovery in leasing
rates year-to-date, growth in lending from the official
sector seems to have been very limited, with fresh
interest only appearing on the very short-term end of
the time spectrum, in order to earn some extra yield.
Moreover, concerns about counterparty risks seem
also to have deterred many countries from entering
the gold lending market. Illustrative of this trend
was the decision by the Bundesbank last year to
repatriate a large portion of its gold holdings stored
in overseas vaults. Nevertheless, a reasonably high
proportion of outstanding gold loans from central
banks are on a multi-year basis and so a relatively
small percentage is maturing in any given period.
gold leasing rates

Tonnes

-50
1000
-100

-200
03.Q1
05.Q1
07.Q1
Source: Thomson Reuters GFMS

09.Q1

11.Q1

13.Q1

200

Looking ahead, we expect that the continued healthy

physical demand in the key Asian markets will keep
leasing rates in positive territory. That said, although
somewhat higher than the ultra-low levels they
were in recent years, rates are expected to remain
contained in the short to medium term. After all,
there remains an abundance of central bank liquidity
on the sidelines of the market, part of which would
be mobilised if rates were to grow sufficiently, this
factor essentially putting a cap on any potential
increases for the time being.
In the longer term, this picture could change.
Although producers have so far remained resistant
to hedging as a strategy for preserving revenue,
as the price is projected to weaken further in the
coming years, net producer hedging could eventually
again appear on the supply side. Such a new drain
on liquidity for gold could well mean that lease rates
will eventually register material increases, which
could encourage a growing number of central banks
to lend gold into the market.

gold leasing rates - historical

3.5

0.5

12-month

3.0

0.4

3-month
1-month

2.5

0.3

2.0
%

0.2
%

600

Demand

-150

0.6

0.1

1.5
1.0

0.0
12-month

-0.1

3-month

-0.2

1400

1-month
Oct

Jan-13

Apr

Jul

US$/oz

The cost of borrowing gold has posted a major

recovery so far this year. For instance, after
spending much of 2009-2012 in negative territory,
the one-month leasing rate turned positive in
February, rising to an average of 23 basis points in
July. To put it into perspective, this was the highest
level since late 2008 when heightened fears about
counterparty risks following the collapse of Lehman
Brothers led to a severe reduction in lending.

-0.3
Jan-12
Apr
Jul
Source: Thomson Reuters GFMS

1800

Gold Price

Supply

0.5
0.0
-0.5
2001
2003
2005
Source: Thomson Reuters GFMS

2007

2009

2011

2013

h1 2013

Outlook for
Central Bank
Activity in the Gold
Market
The more cautious attitude towards gold among
reserves managers year-to-date has led us to review
our views on the outlook for the official sector, to
allow for a larger decline in net central bank buying
than initially had been expected for this year overall.
That said, central banks in aggregate are expected
to remain a major buyer of the yellow metal, with
their net purchases likely to stay steady at roughly
70-100 tonnes per quarter for the rest of the year.
Considering the detailed discussion of various
institutions future activities, although the majority
of the points made in the previous edition of this
report remain broadly valid, it is worth iterating and
updating them with data based on more recent
information.
Starting with signatories to the CBGA, disposals
from the group are expected to remain tiny in the
short term. Despite potential gold disposals from
Cyprus, we do not believe that any such sale would
lead to larger-scale offloading from other indebted
European countries. This is firstly because any
money raised would be far too small relative to
outstanding debt levels and, secondly, the scope
for such operations to panic the bond and foreign
exchange markets could render the exercise
counterproductive (see focus box on page 9).
Turning to countries outside the CBGA, this group
is forecast to remain net buyers for the rest of the
year, as the argument for reserves diversification
will remain in place in the short to medium term.
Benefiting from still relatively high commodity prices
and trade surpluses generated by export sectors,
foreign exchange reserves held by the developing
world have continued to hit successive record highs
in recent years. Basis the latest IMF statistics,
almost 85% of known reserve portfolios reported
by emerging and developing countries were held
in the dollar and euro at end-March 2013. The first
is a currency that had been on a declining trend for
much of the 2000s and the second is a currency
that remained very much in the grips of an ongoing
sovereign debt issue and dire economic conditions.

Looking ahead, even though improving yields on

US Treasuries year-to-date have reduced the yellow
metals appeal, there is much greater appreciation
today of its unique property as a financial asset that
is nobody elses liability, especially in the aftermath
of the financial and sovereign debt crisis. More
importantly, even if the Fed starts to scale back its
asset purchase programmes later this year, this will
be a long and gradual exit, as the United States
underlying economy is still fragile and inflation
pressure has stayed moderate. As such, we expect
very loose monetary policies to remain in place for
an extended period and the low interest environment
could persist throughout 2015.
In addition, the persistence of the debt crisis in
the Eurozone and further monetary loosening by
other major central banks, Japan in particular, may
well keep yields on highly-rated sovereign bonds
at extremely low levels for an extended period.
These developments are likely to erode confidence
in fiat currencies, which should in turn continue to
encourage developing countries to reallocate a
portion of their reserves in favour of gold.
However, it is worth stressing that we expect central
banks as a whole to maintain their current pace of
acquisitions, as the limited size of the gold market
(especially compared with some countries foreign
exchange reserves) means that the process of
portfolio diversification will remain slow. Meanwhile,
the scope for potential political difficulties from any
major purchase in the international market at a time
when confidence in the bond market is still fragile
may well restrict volumes bought by developing
countries. We would expect, instead, further
discreet and modestly sized operations to be carried
out in the international market, coupled with the
purchase of local mine supply by some countries
where domestic mine production is available.
Finally, we would admit that our forecast could be
somewhat conservative, given the relatively high
level of purchases seen in the past two years.
The greatest risk to it in our view is that strategic
acquisitions could be much higher than we project,
especially if there is a severe loss of confidence
in the major international reserve currencies or if
certain central banks take advantage of low prices
once greater price stability is restored in the gold
market. Such an outcome would of course be
highly positive for the gold price, both in terms of its
direct impact on golds supply/demand balance and
through the boost it would give to investor sentiment.

h1 2013

Heavy CBGA sales

unlikely in the short
term
The official sector, which currently accounts for some
17% of global above-ground stocks of gold, has been
an important focus for the market, given its impact
on investor sentiment towards gold and the historical
pressure for fundamental changes to the international
financial system.
For instance, during the 1990s, the bear market in gold
was influenced to no small extent by the perception,
and to a large extent the reality, of a supply shock
from the official sector. In particular, the news on
7th May 1999 that the United Kingdom intended to
sell 58% of its gold reserves was a hammer blow to
price expectations that had already suffered from a
series of negative announcements supporting IMF
and Swiss sales. But of far greater significance to
price expectations was the joint policy statement by 15
European central banks on 26th September 1999 (the
start of the first Central Bank Gold Agreement) to the
effect that they had decided to cap their collective sales
in the following five-year period and to limit lending
and other activity to prevailing levels. This was widely
viewed as being very bullish for gold, as the Agreement
removed a great deal of uncertainty from the market,
by formalising the sale of a large chunk of central bank
bullion reserves. Indeed, despite heavy disposals from
European countries over much of the 2000s, this did
not prevent the gold price from moving sharply higher,
as the risk of uncoordinated dumping of European
gold holdings onto the market was eliminated.
After reaching a peak in 2005, sales from the CBGA
group have fallen dramatically thereafter before
dropping to almost non-existent levels since the start
of the third Agreement on 27th September 2009.
Nevertheless, the dramatic price decline in mid-April
following the European Commissions proposal to sell
just ten tonnes of Cypriot official gold reserves clearly
illustrated how developments in the official sector
could spook an already nervous market. Cyprus itself
was arguably irrelevant, given its tiny gold reserves;
the key to its palpable impact on sentiment was that it
suggested that the turmoil in the euro area could lead
to a position whereby politicians could start to hold
sway over southern European central banks, where

gold reserves are substantial.

Technically this interference with the Bank of Cyprus

is prohibited in the European Union, which enshrines
central bank independence in the Treaties of Rome and
of Maastricht and backs that up by Article Seven of the
Protocol of the European System of Central Banks and
of the European Central Bank. Central bankers are
the custodians of a nations gold and its monetary role.
The use of gold for fiscal purposes is not permitted as
it suggests overt political influence on the central bank
in question. Furthermore, given the elevated level
of sovereign debt held by the European peripheral
countries, such gold sales would make an extremely
limited contribution towards solving the problem.
Taking Italy as an example, despite being the worlds
fourth largest official gold holder, the value of its gold
reserves was only equivalent to $94 billion at June2013 (74.7 billion), against outstanding debt of around
1.685 trillion.
Looking ahead, we remain of the view that sales from
the CBGA group will remain trivial for the remainder
of the third Agreement. As has been discussed in
previous editions of this report, the probable lack of
interest among CBGA members in launching new
gold sales should be viewed within the context of the
considerable decline in the blocs bullion holdings since
the late 1990s. Indeed, we would argue that those who
were inclined to cut gold reserves may have already
done so in the last decade. Meanwhile, golds price
performance in recent years has also seen certain
central banks become more gold-friendly. Moreover,
even though it is fair to say that the worst of the debt
crisis has passed, investor confidence in the European
peripheral government bonds is still fragile while fresh
shocks remain possible. As such, some central banks
may well decide to postpone sales plans in order to
avoid putting additional pressure on bond yields.
As we will soon enter the final year of the third CBGA,
there is already some discussion about whether
the Agreement should be renewed after the current
programme expires on 26th September 2014,
especially given very low levels of sales in recent
years. However, it is of note that many countries
within the group are still arguably overweight in
gold. Once the regions debt situation stabilises, it is
possible to foresee a recovery in strategic disposals
from certain countries and an upper annual sales limit
should remove market uncertainty. Those arguing
for a renewal of the CBGA will have seen their case
still enhanced, particularly taking into account the
profoundly negative impact that the news of Cyprus
gold sale plan had on the gold price in mid-April.

h1 2013

Appendix - official sector gold holdings and other reserves

Country
Gold in
Gold in Other
Gold as Data as
Tonnes
US$ bn1
Reserves
% of Total
of end-

in US$ bn Reserves
1
United States
8,134
311.7
134.6
69.8%
June
2
Germany
3,391
129.9
66.1
66.3%
June
3
Italy
2,452
94.0
50.7
64.9%
June
4
France
2,435
93.3
51.3
64.5%
June
5
China, P.R.: Mainland
1,054
54.2
3,464.3
1.5%
March
6
Switzerland
1,040
46.6
470.8
9.0%
May
7
Russia
996
38.2
474.9
7.4%
June
8
Japan
765
29.3
1,208.4
2.4%
June
9
Netherlands
612
23.5
21.6
52.0%
June
10 India
558
21.4
263.8
7.5%
June
11
Turkey
441
16.9
105.5
13.8%
June
12 Taiwan
424
16.2
406.6
3.8%
June
13 Portugal
382
14.7
2.8
84.2%
June
14 Venezuela
366
18.8
7.4
71.8%
March
15 Saudi Arabia
323
14.5
689.3
2.1%
May
16 United Kingdom
310
11.9
90.1
11.7%
June
17 Lebanon
287
13.5
38.7
25.9%
April
18 Spain
282
10.8
35.4
23.4%
June
19 Austria
280
10.7
11.8
47.6%
June
20 Belgium
227
8.7
18.0
32.6%
June
21 Philippines
193
8.6
73.3
10.5%
May
22 Algeria
174
7.8
191.4
3.9%
May
23 Thailand
152
5.8
164.6
3.4%
June
24 Kazakhstan
131
5.0
21.0
19.3%
June
25 Singapore
127
5.7
258.2
2.2%
May
26 Sweden
126
4.8
60.6
7.4%
June
27 South Africa
125
5.9
41.8
12.4%
April
28 Mexico
124
4.7
164.0
2.8%
June
29 Libya
117
5.2
119.6
4.2%
May
30 Greece
112
4.3
1.3
76.3%
June
31 South Korea
104
4.7
323.3
1.4%
May
32 Romania
104
4.0
42.1
8.6%
June
33 Poland
103
3.9
102.8
3.7%
June
34 Australia
80
3.1
45.0
6.4%
June
35 Kuwait
79
3.0
32.0
8.6%
June
36 Indonesia
76
3.9
101.3
3.7%
February
37 Egypt
76
3.6
11.0
24.5%
April
38 Brazil
67
2.6
366.5
0.7%
June
39 Denmark
67
2.6
82.5
3.0%
June
40 Pakistan
64
2.5
7.3
25.2%
June
1 Market valuation based on end-month gold prices respectively
Source: IMF and central bank websites

10

h1 2013

About Thomson Reuters GFMS

www.thomsonreuters.com
www.gfms.co.uk
Thomson Reuters GFMS is recognised as one of the worlds leading economics consultants in precious
metals, specialising in research into the global gold, silver, platinum and palladium markets. It is also a
leading provider of top quality research on base metals and steel. Thomson Reuters GFMS analysts present
regularly at international conferences and seminars on precious metals and commodities and are frequently
quoted in the media for their views on the gold, silver and PGMs markets.
Thomson Reuters GFMS is credited with producing the most authoritative surveys of the gold and silver
markets, the annual Gold Survey and World Silver Survey, and Thomson Reuters GFMS gold and silver
supply/demand data forms the global benchmark; the international gold and silver markets are largely
dependent on Thomson Reuters GFMS statistics. Thomson Reuters GFMS also produce a range of other
publications dealing with all aspects of the precious metals markets, and provide consultancy services in the
form of tailor-made research into selected areas of the precious metals markets.

11

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