EM central banks gold buyers

Brazil and China are among the EM central banks that are buying gold. They are starting at a low base relative to G7 countries but there is a clear indication that holding gold reserves is believed to be  a good diversification strategy.

Philippines     +36% or 1.6 mm oz
Brazil             +56% or   .6 mm oz
Mexico          +17% or   .6 mm oz
South Korea  +79% or 1.0 mm oz

In six of the last seven quarters, central bank buying has been above 100 tonnes. Still central bank buying was only 9% higher over the year while ETF buying was up over 50% for the year. The major Eurosystem, Sweden and Switzerland  central banks are still subject to the third gold agreement which does not expire until 2014. The agreement limits sales but central banks have not fulfilled the maximum allowable tonnes that can be sold. It is not binding like first agreement when central banks were active sellers. 

The reason for central bank buying is separate from the usual view that gold is an inflation hedge. With interest rates near zero, gold  can be viewed as a good reserve currency hedge. Gold is the only safe assets as defined by the IMF which is not a liability of a someone else. Gold is being proposed as a zero risk weighted item by the FDIC per a Financial Institution letter from June 18, 2012.

Of course, this is still a drop in the bucket relative to what was sold during the 19 years ending in 2008. Central banks then sold about 10 million ounces a year. What is clear is that central banks especially in emerging markets want to hold other assets than dollars, euros, or yen.