Gold Demand Trends Q3 2018

Q3 saw another quarter of healthy central bank net purchases of 148.4t, up 22% y-o-y. This is the highest level of net purchases since 2015, both at the quarterly and y-t-d level. A couple of other central banks joined Russia, Turkey and Kazakhstan in significantly increasing reserves in Q3.

Russia’s gold holdings continued to grow as it sold its dollar assets. Q3’s 92.2t increase was Russia’s biggest quarterly net purchase on record. Russian reserves amounted to over 2,000t for the first time, equivalent to 17% of total reserves.¹ Earlier this year, First Deputy Governor, Dmitry Tulin, stated that gold is “a 100 per cent guarantee from legal and political risks”, highlighting its lack of counterparty risk and wider risk hedging properties.² Russia has already sold the majority of its holdings of US Treasuries³ and said it will continue its policy of de-dollarisation.⁴

Despite political and economic turmoil, Turkey continued to add gold to its reserves. Net purchases (excluding Reserve Option Mechanism holdings) grew by 18.5t in Q3, a quarter that saw the lira weaken by 25%. This brought official holdings to 258.6t. By contrast, Reserve Option Mechanism holdings at the central bank declined by 122.9t. Responding to growing financial stress, the Turkish central bank loosened liquidity measures in August, reducing the amount of gold (as well as domestic and foreign currency) commercial banks are required to hold as part of their reserves. The subsequent decline in ROM reserves is likely due to the unwinding of swaps rather than sales. Please see our recent Market Update: Central bank buying activity for more information.

Kazakhstan continued its steady accumulation. Gold reserves at the central bank continued to rise throughout Q3. Net purchases of 13.4t for the quarter brought total reserves to 335.1t. For the first time in seven years the bank plans to start selling small amounts of bullion internationally in order to make domestic gold more recognised in the market.⁵

A growing number of central banks have been adding gold to their reserves. After minor purchases over recent months, the Reserve Bank of India ramped up its buying in Q3, increasing reserves by a further 13.7t. This brings y-t-d purchases to 21.8t. European central banks also started to buy gold. The National Bank of Poland bought gold every month in this quarter, boosting the overall level of reserves by 13.7t to 116.7t.  And in early October, Hungary announced that it had increased gold reserves ten-fold – from 3.1t to 31.5t, its highest level since 1990 –  with the aim of enhancing the long-term stability of its reserve portfolio, citing gold’s lack of counterparty or credit risk as key benefits.⁶

Q3 was also marked by several reports of purchases that have yet to be reported via the IMF’s International Financial Statistics. In early September, the central bank of Iraq stated that it had taken advantage of lower gold prices to buy 6.5t, but the timing of these purchases remains unknown.  Similarly, the Mongolian central bank bought 12.2t in the first eight months of this year, matching its purchasing to the same period of last year and buying more than half of its full-year target.⁸

Net sales were virtually non-existent in Q3. Czech Republic (-0.5t ) and Germany (-0.2t ), the latter of which makes regular sales in relation to its coin-minting programme, were the only countries that registered visible declines.