Looking Behind the Saudi Gold Holdings Increase

Jeffrey Nichols
Published 6/23/2010

Gold prices continue to march higher, hitting a new all-time high near $1,265 this Monday morning in London trading before settling down to the $1,250 to $1260 area. Reportedly, the catalyst to higher gold prices was the revelation that Saudi Arabia's central bank, the Saudi Arabian Monetary Authority (SAMA) had made a sizable addition to its official gold holdings in early 2008 but only recently chose to report this metal in its official central bank reserve accounts.

According to the latest statistics published by the International Monetary Fund reporting the foreign exchange and official gold holdings of its member countries – and publicized last week by the World Gold Council, a pro-gold marketing association of many of the world's top gold mining companies – the Saudi Arabian Monetary Authority increased its gold holdings by nearly 180 tons in the first quarter of 2008 from 143 tons to its current reported level of 322.9 tons.



In a footnote to its first-quarter 2010 report, the Saudi monetary authority said that its "gold data have been modified from first quarter 2008 as a result of the adjustment of the SAMA's gold accounts." It seems likely from the available evidence that the Saudi's bought all of this gold in the first quarter of 2008 -- but chose not to publicize or report the purchase until now, instead holding the bullion in a "non-reserve" account or possibly by the Saudi Sovereign Wealth Fund on behalf of SAMA.



We have long held the view that some of the oil-rich nations might be buying gold on the sly through their sovereign wealth funds that do not necessarily report their investment holdings. Why did SAMA choose not to report its gold purchases until now? We can only guess it feared aggravating relations with the United States since the U.S. Treasury and the Federal Reserve view gold accumulation by foreign central banks as a threat to the dollar's international reserve status. But with a number of other central banks either buying gold outright or surreptitiously and with U.S. policymakers already on the defensive, the Saudi's may no longer feel quite so obliged to tow the U.S. line.



The Saudi news is reminiscent of China's announcement in April 2009 that it had purchased some 600 tons of gold over the prior six years, more than doubling its holdings from 454 tons to the current reported level of 1054 tons. The Chinese have not reported additional gold purchases since then.



However, we (like many other gold-market observers) believe China's central bank continues to buy more gold month after month but chooses not to report these additions so as not to boost the market price as such an announcement would likely do. We would not be surprised to learn that SAMA continues to buy as well, but like the Chinese, chooses not to report its ongoing purchases in order to minimize the upward price pressure resulting from its gold-buying program.



Regardless, SAMA's golden revelation confirms our view that central banks around the world are adopting an increasingly favorable view of gold ... as their concerns about the U.S. economy and the U.S. dollar's long-term purchasing power continue to mount.



Among the central banks that have announced gold purchases in the past year or so are Russia, Kazakhstan, India, Venezuela, the Philippines, Sri Lanka, and Mauritius ... and it is likely that a number of other counties, including China and possibly other Mideast oil-rich states, are buying quietly without publishing or reporting their purchases.



Importantly, central bank purchases are no small potatoes – and are already contributing to the yellow metal's continuing bull market run. Russia alone bought 117.6 tons last year and another 26.6 tons in this year's first quarter, while the Philippines purchased 9.6 tons and Kazakhstan 3.1 tons in the first three months of 2010.



Last year, the official sector (central banks and the IMF) reported net purchases of some 425 tons of gold. This came after two decades of net selling by the official sector of roughly 400 tons per year on average over the prior 20 years.



We think central banks as a group -- and a growing group, at that -- will continue building official gold reserves as a means of diversification and reducing exposure to U.S. dollar-related risks for years to come. This year, we conservatively expect that central banks as a group will buy -- and report -- some 150 to 300 tons -- and possibly much more counting unreported purchases.