In a trend where cautious central banks are bolstering their gold reserves to manage rising macroeconomic and geopolitical pressures, Nigeria and other African countries appear to have pitched tent with a passive audience.
Central banks buying ticked its highest point in 50 years, as net purchases rose 74 percent higher year-on-year to reach 651.5 metric tons in 2018, according to the World Gold Council (WGC). The multi-decade high in demand volume is concentrated among Russia, Turkey and Kazakhstan, and is seen as the highest level of annual net purchases since the suspension of dollar convertibility into gold in 1971.
Gold demand in 2018 reached 4,345.1 tons, up from 4,159.9 tons in 2017, and was boosted in the fourth quarter by 112.4 tons of ETF inflows.
The greater pool of these banks was increasingly driven to see value in gold as a diversifier on concerns over heightened geopolitical and economic uncertainty that rocked 2018. The hiccups refocused their attention on the principal objective of investing in safe and liquid assets.
According to a WGC survey, 76 percent of central banks still view gold’s role as a relevant safe-haven asset, 59 percent cited its effectiveness as a portfolio diversifier and almost one fifth of central banks signalled their intention to increase gold purchases over the next 12 months.
Russia, seen to be defending its reserves against dollar impact, bought 274.3 tons in 2018, the highest level of annual net purchases on record and the fourth consecutive year of over 200 tons purchases, with funding from almost total sale of its US Treasuries portfolio. Russia’s gold reserves have increased for 13 consecutive years, growing by 1,726.2 tons over the period to total 2,113 at the end of the 2018.
The Central Bank of Turkey increased gold reserves by 51.5 tons in 2018, the second consecutive year of net purchases, 40 percent lower than the 85.9 tons it bought in 2017, when it re-entered the market after a nearly 25 year absence.
Kazakhstan’s gold reserves rose 50.6 tons in 2018 to 350.4 tons 2018, marking the eighth consecutive annual increase. On a monthly basis, its reserves have risen for 75 consecutive months, with net purchases totalling an impressive 246.4 tons over that period.
Having been passive for two years, China announced that its gold reserves had increased by just less than 10 tons in December, to 1,852.2 tons. Gold accounted for 2.4 percent of its total reserves at year-end, up from 2.3 percent at the end of 2017, while FX reserves fell $67 billion over the year to $3.1 trillion.
But gold reserves in Nigeria remained unchanged at 21.40 tons in the fourth quarter of 2018 from 21.40 tons in the third quarter of 2018. Nigeria’s gold reserves averaged 21.37 tons from 2000 until 2018, reaching an all-time high of 21.40 tons in the first quarter of 2018 and a record low of 21.37 tons in the second quarter of 2000.
Analysts believe the country might have enough on its plate already with the struggle to grow its foreign reserve than eyeing gold
“Gold tends to perform very well when addressing inflation. Last year because we had this global inflation generally, headline inflation in the US and some other countries increased and probably prompted the higher gold buying by the banks,” Omotayo Abimbola, fixed income analyst at Ecobank, said.
“For, Nigeria, it might probably want to keep more cash for liquidation instead of buying. They might want to stay heavily exposed to financial securities rather than have precious metal. It depends on their reserve management strategy.”
Nigeria’s foreign reserves was at $47, 361 billion as at last April, far from Russia’s $466,900 billion and Turkey’s $98,315 reserves.
Amid times of market crisis, gold, unlike a fiat currency, can help stabilise economies. It could be pledged as collateral or sold to raise liquidity in a foreign reserve currency. The value of gold often rises when there’s a dip in global demand for the US currency. Central banks now possess about 33,800 metric tons of the metal, about a fifth of all the gold ever mined.
Although Russia, Kazakhstan and Turkey accounted for a large portion of demand in 2018, their share fell to 58 percent from 94 percent in 2017 as other central banks chose to significantly increase their gold reserves.
Notably, European central banks including Hungary made one of the largest purchases, increasing its gold reserves ten-fold in October, to 31.5 tons, citing a hedge against future structural changes in the international financial system, as well as its lack of counter-party.
Similarly, Poland’s gold reserves rose by 25.7 tons during 2018, over 25 percent y-o-y.
Indian net purchases were another notable component of central bank demand in 2018, with monthly purchases beginning in March and picking up in the second half of the year. In total, gold reserves rose by 40.5 tons, the highest annual growth since the purchase of 200 tons from the International Monetary Fund In 2009.
Mongolia announced that it had bought 22 tons of gold in 2018, in line with its stated target. This represented a 10 percent increase on 2017 purchases. One of the drivers of this growth was a five-month National Gold to the Fund of Treasures campaign, which encouraged miners and individuals to sell their gold to the central bank.
