EDITOR NOTE: As retail gold demand has cooled from feverish to warm, central banks see the current pullback as a timely opportunity to come in and swoop up as much gold as possible amid the retail crowd’s indecision. What we’re seeing is a gold rush and an increase in local gold production. Currently, central banks are going directly to the source--their domestic mining companies--to claim first what’s being mined from the ground. In addition to China opening its floodgates to gold imports, this aggressive move by central banks will likely push gold to higher price levels. And you know what will happen next, given the predictability of the retail investing mindset. Gold will rise along with inflation and the inverse decline of the dollar. The Federal Reserve’s banking stress test will take place in June, exposing banks’ overleveraged exposure to risk (this will become transparent no matter how the Fed spins it). Chatter regarding the BIS’ Basel III implementation, when gold becomes a Tier-1 asset, will grow louder. And finally, the retail crowd will jump into gold at an already elevated price, pushing the yellow metal to record heights. Get ready, compliance audits begin June 28th! Buy non-CUSIP gold now, call 800-474-9159.
An increasing number of emerging central banks are turning to local gold production to boost their holdings, and the purchases may be helping to foster better practices in the mining industry.
This is one of the various advantages of local purchases that the World Gold Council (WGC) highlights in a report published on April 26.
The organisation says local gold purchase programmes allow central banks to purchase gold with their national currencies rather than deploying hard currency resources.
Additionally, central banks’ involvement in local gold production can positively affect development, raising standards on labour conditions, environmental regulations, and fair prices for artisanal and small-scale gold mining (ASGM) operations.
“They can help to formalise small-scale mining, reduce the use of mercury in the production process and, where the purchases are conditional on meeting relevant standards, support due diligence requirements so that artisanal gold can be sold on the international market,” says the report.
The involvement of central banks in countries such as Ecuador, Ethiopia, Mongolia and the Philippines “can provide small-scale producers with greater confidence about the terms on which they trade their gold and make them less vulnerable to extortion or intimidation by criminal groups”, adds the WGC. “[Central banks] can foster best practice across the entire gold supply chain.”
In spite of the local resources, the report points out that most central banks in gold-producing countries have relatively low levels of gold holdings.
For instance, according to WGC data, in April 2021, Mongolia’s gold holdings only ranked 74 in the world, at 8.2 tonnes, representing 10.2% of total reserves. Ecuadorian gold holdings ranked at 64 globally at 21.9 tonnes and 20.7% of reserves. The Philippines is at 25, with 179.5 tonnes and 9.3% of reserves.
Nonetheless, ASGM operations in this countries have a huge importance both in relation to the value of gold production and the people working in the industry. “This is true even in a country like Mongolia, where there is no established ASGM tradition,” says the report. “In Ethiopia, for example, 1.3 million people are estimated to be directly involved in ASGM, with 7.5 million livelihoods depending on it.”
Against this background, the WGC thinks central banks should leverage their local gold purchase programmes to diminish the negative impact of what it calls “malign middle men”. “This objective is most likely to be met where buying counters are easily accessible to miners but, even in relatively successful schemes, this is not always the case.”
For instance, Ethiopia has nine counters across its land area of 1.1 million square kilometres. Ecuador is part of the mountainous Andes region, and has two buying centres across its 256,000-plus square kilometres.
The Central Bank of Mongolia carries out purchases in the capital, Ulaanbaatar. Nonetheless, the central bank is dependent for much of its ASGM supplies on aggregators and traders, says the report. “Gold supply chain and trading in Mongolia is highly centralised, the Bank of Mongolia purchases gold directly from individuals and entities and there are only two metal assaying divisions and one-stop gold trade centres of the BoM in Darkhun-Uul and Bayankhongor,” it notes.
In addition to these difficulties, the WGC report identifies a set of structural difficulties hampering the further development of local central bank gold purchases.
Even for countries that have developed state-sponsored gold-buying programmes, it is challenging to accurately measure the exact volume of gold coming from ASGM producers. To make matters worse, “even where a central bank has a theoretical sole right to purchase ASGM gold they do not always find it easy to uphold this dominance”, says the report.
Additionally, new purchase schemes face changes in taxation. According to the WGC, this is one of the main reasons why the Central Bank of the Philippines (BSP) cut its gold purchases following a 2012 court ruling. The government made further amendments to the taxes in 2020 in a bid to support central bank purchases.
Originally posted on Central Bank