Central banks bought nearly 400 tons of gold in Q3 2022

Fall 2022 gold data surprised most precious metals market analysts. The scale of the phenomenon came as a positive surprise to those interested in bullion.

Purchase of 400 tons by central banks

W third quarter 2022r. central banks have purchased nearly 400 tons of gold, according to press releases based on reports from the World Gold Council. The above is impressive, because while we have been accustomed to increased buying by central institutions for many years, this volume is the highest quarterly result in a long time. In doing so, there are several records that have just been broken.

Indeed, this is the largest quarterly purchase since 2010., when central banks resumed buying bullion. It can already be assumed that overall 2022. will also be the year of the largest purchase made by central banks in a long time. Mathematically, the chances of a sharp sell-off in Q4 do exist, but factors fundamentally make it unrealistic. We are also dealing with the eighth consecutive quarter of buying, and if we drop the veil of silence on the ill-fated H1 2020r., that's even with virtually uninterrupted since 2010. shopping string.

In addition, it is worth mentioning the largest annual purchase conducted by central banks since 1967. That is, since Western Europe massively exchanged the U.S. dollar for the related bullion. As a result, it contributed to the suspension of the convertibility of bullion and the dollar, violated the accepted peg and led to the end of the Bretton Woods system.

Quarterly purchase of gold by central banks since 2010. Source: Gold Demand Trends Q3 2022

It is known that of the registered slightly more than 100 tons are:

• 17.5 tons were purchased by India, bringing its central bank reserves now to nearly 790 tons.
• 8.7 tons were purchased by Kazakhstan, which appears to be gradually buying back gold sold between December and March 2022. However, in July 2022, it had to dispose of approx. 11 tons to maintain stability of the currency, so it remains slightly negative on the quarterly balance sheet. The country, due to the social and political-economic situation, had to take care to stabilize its currency. Kazakhstan is the world's first uranium producer and a major oil producer.
• Qatar continued purchases from H1 2022r. and purchased 14.8 tons of bullion. The quantity shown was purchased in July. At the same time, this is the largest single volume that the local central bank has purchased since 1967.
• Turkish central bank purchased 31 tons in Q3 2022 and remains largest buyer of yellow bullion. Its reserves currently stand at 489 tons, or 29% of Ankara's total reserves.
• Turkish banks another bought 31 tons. They use gold in the form of mandatory deposits instead of the legally required share of their own currency, as permitted by the local central bank. Indeed, the lira is among the emerging market currencies with one of the largest depreciations in value over the past few years.
• Uzbekistan added 26 tons to its assets. While reporting on the stock as of September 2022. at 390 t. This in itself is an interesting casus. After all, the country is home to the Muruntau mine - one of the largest of its kind in the world. Although U.S. sources put the value of the production data in question, Uzbekistan's central bank remains one of the most active participants in the gold market.

The above omits a few small-tonnage transactions that do not affect overall volume. However, these are just some of the big moves we experienced in the July-September period. Adding to the uncertainty is the fact, and at this point it is not clear who purchased about ¾ of the volume. We are likely to learn about this from the International Monetary Fund's publication on reserves. The publication date may be delayed, as has happened many times in the past. Especially since the World Gold Council itself, citing Metal Focus from which it draws its data, states that:

"This is not uncommon, as not all official institutions publicly report their gold holdings or may do so with a delay. It is also worth noting that while Metals Focus suggests that the purchases took place in Q3, it is possible that they began earlier in the year. This, in turn, may result in future revisions as more information becomes available."

In search of a lead on the LBMA

London Bullion Market Association is the most important global OTC market for gold. The Comex may seem more important here because of its location, but it is the LBMA that trades the largest physical volumes. In Q3 2022r. The LBMA entered with a collective inventory of 9616 tons of gold. They were deployed in several warehouses in the London metropolitan area.

July ended with a slight net inflow increasing the balance by 80 thousand. ounces. It is less than 2.5 tons, so the volume is not that significant. August closed with a stock of 9565 tons. There has been, therefore, an outflow of 51 tons. However, the biggest movement of inventory changes took place in September. LBMA warehouses ended it with 9442 tons of yellow bullion, down 123 tons from the previous month. In particular, this latest balance sheet change is significant, as it is the largest since January 2017.

The LBMA inventory rebalancing consists of two different elements. One is the typical balance sheet changes in the London Loco accounting system. In other words, entity A sells or lends gold to entity B. Bullion physically remains in inventory and its owner changes. The above should therefore not affect aggregate inventories, but the LBMA market also sees transactions of physical purchase and consequent export outside the market. Such moves - especially if they involve larger tonnage - are made several months in advance, as a given volume may, for example, be subject to several other pledge transactions at the same time.

Central banks, as bullion and investment banks, almost always use LBMA warehouses as liquidity guarantors. Gold being withdrawn from the trading markets does not generate profit - for this it must be present in a liquid market where it can be traded. Only central banks realistically choose to buy and export bullion to safe locations. But this is due to their different function and existential assumptions.

Source: own compilation of LBMA stock based on
https://www.lbma.org.uk/prices-and-data/london-vault-holdings-data

A net volume of 174 tons of gold left London warehouses in July August and September. For the LBMA, there are also entities selling bullion or supplying it under long-term commitments. At the same time, it is worth noting that the stock as of January 2022. have not changed much. This means that on the LBMA it managed to balance the outflow of gold with its supply. Largest in 2022. so far change on month's closing balances, place on stocks fell in february - march. At that time, 91 net tons were withdrawn from the market due to the start of the war in Ukraine.

In doing so, it is worth noting another local trend. In 2019., included physical gold in the class of the most trusted assets that central banks can hold. The above was done as part of one of the banking reforms under Basel III. In short, currency, domestic debt bonds and gold are considered to be certain assets. Since then, we have always seen an increase in LBMA inventory in H2 each year. Of course, it should be taken into account that this is also normally a strong period of bullion demand. However, this confirms that non-standard transactions took place in September.

In this situation, British export data was checked. The UK's ONS (English. Office for National Statistics) reports that:

"All trade figures exclude non-monetary gold and other precious metals, unless otherwise stated. This is because movements in non-monetary gold, an important component of precious metals, can be significant and highly volatile, distorting underlying trends in commodity exports and imports."

In search of a motive

One could speculate on who might have made the purchases of the remaining 300 tons of gold. First ask the question of motive - why the central bank buys gold?

It would now be appropriate to address the definition of the idea of central bank operations, which in itself is a technically interesting topic, but extremely vast. Therefore, we are forced to make some shortcuts. The central bank is the supervisor of the local financial and settlement system, the regulator of activities and the issuer of local currency. His duties also include handling the state budget (that is, he acts as the country's top accountant), and maintaining the country's bank accounts, including deposits in securities, foreign currency and gold.

Among the assets in the reserves of central banks, there are two whose recognition seems to be timeless and widespread. The first is the official tender of the United States, the U.S. dollar. About 60% of debt globally is denominated in the dollar, 55% of lending in international markets is in this currency, the share of dollar reserves in central banks is 60% and in the SWIFT system until recently 40% of transactions were settled in USD.

The second is gold, which is in the perception of the human race a precious metal of great value, used, as the basis of the monetary system for most of the history of civilization and the ultimate security.

Despite the locally strong role of the Euro, the rising Yuan Renminbi, the strong role of the Yen, the Swiss franc, traditionally considered a safe haven currency, or the British pound having its best days already behind it. It is gold and the dollar that are primarily considered worthy of attention and ownership.

Each central bank follows a different rationale and investment strategy as to the assets it holds. Gold can be defined in the above context as an asset with near-zero credit risk, being a strategic ultimate hedge and serving a diversification function. In doing so, the narrative often still includes a historically strong anti-inflationary factor.

However, currently gold should also be understood as the only viable alternative to the US dollar, which will not be depreciated any time soon. This is facilitated by the environment we are currently in:

• Liquidity drying up in financial markets, as evidenced by reverse repos,
• Dramatic increases in the cost of servicing debt incurred by emerging markets and denominated in dollars, as evidenced by the financial condition of numerous countries,
• The appreciation of the dollar's long-term value is confirmed by the DXY index,
• The need to make numerous currency interventions to stop the depreciation of the value of one's currency is confirmed by the numerous cases of emerging market central banks but also m.in. Bank of England and Bank of Japan,
• In doing so, we are seeing an accelerating transition of former US allies (m.in. oPEC) to the BRICS camp, which is dominated by China. In effect, this ends the petro-dollar deal,
• BRICS plans to create an international currency based on a basket of commodities including m.in. gold. What should be seen as a clear challenge to the role and function of the U.S. dollar.

DXY dollar index on a monthly basis. Source:
https://www.tradingview.com/chart/?symbol=TVC%3ADXY

Habitual Suspects - so does Poland?

Supposed gold purchases in Q3 2022r. remain quite conservative. De-dollarizing BRICS and the usual suspects in the form of China, India, Turkey, Thailand. If we take an additional glance at gold export flows from Switzerland, from mid-2021. the growing share of Arab countries is becoming more pronounced. To the above, however, we are inclined to add Hungary and Poland, which have already declared their willingness to buy in the past.

In the context of domestic gold reserves, on October 5, 2021. in an interview, NBP President Adam Glapinski stated m.in. following:

"(...) in order to further increase Poland's financial security, we will continue our current policy, we will certainly strive to increase our gold reserves. However, the scale and pace of purchases will depend m.in. on the dynamics of changes in official reserve assets and current market conditions."

Subsequently, the declaration of the purchase of bullion by the NBP was repeated several times throughout 2022. They concerned importing another 50 tons of gold from the LBMA market to Poland and purchasing a further 100 tons of gold in 2022. It was mentioned on this occasion that, as part of diversification, some of the volume may also go to the US Comex.

Source: NBP balance of payments statistics,
https://www.nbp.en/home.aspx?f=/statistics/interviews/introductory.html

From the September NBP reserves as of November 4, 2022. does not show that a purchase has been made. At least until Monday, November 7, 2022. it therefore remains an open question - that is, until the NBP publishes data for October 2022.

Industry opinion is that the NBP knows how to buy gold on the downside. At the end of the 1990s, purchases were made, as a result of which the Polish gold reserves stabilized for quite a long time at 102.9 tons. This was done near the price bottom, when, for example, the Bank of England was divesting its reserves. Subsequently, in the period July - October 2018r. 25.7 tons of bullion were purchased. This took place during a years-long lateral movement. After that, however, in the period May-July 2019. another 100 tons were purchased. And this was done just before the appreciation of the bullion price resulting from Basel III.