For many years, the market has been taught that central banks are buying gold. They must be devising plans if they are not actually purchasing gold. It will only be a matter of time before they start developing strategies if they are not already. Indeed, portfolio managers at hedge funds have informed me that they "know for a fact that the Fed has ordered China to buy gold."In 2005, the reasoning was that the Fed tried to raise long-term rates but was unable to do so when China was buying a lot of U.S. government bonds; Therefore, it is alleged that the Chinese were being instructed to purchase gold rather than U.S. paper. It didn't matter that the math wasn't even remotely comparable; Perception was everything. However, the suggestion that nations are shifting away from the currency and toward gold, for instance, would be enough to send the U.S. dollar lower due to the current sensitivity regarding how "foreigners" view the currency. In fact, China's apparent rejection of the U.S. dollar, which led to a decline in its value and, as a result, devalued the value of its foreign currency reserves, is frequently cited as the reason for the country's recent decision not to purchase gold directly from the International Monetary Fund.
Commentators appear to frequently compete with one another to make the most sensational claim in order to boost their careers and ensure press coverage. I recall reading on a newswire that an analyst predicted that a particular oil-producing nation would unquestionably buy gold; The market increased despite my dismissal of it as absurd. Why did I behave in such a meaningful way?
Simple: At the time, gold was being sold to me by the nation's central bank! All of this demonstrates that sentiment alone is capable of driving the price, rather than the specific properties or outlook of gold.
Until recently, central banks' 20-year track record in the gold market has overwhelmingly been one of selling. The list of sellers has been much longer, with China, Argentina, Poland (and later India, Russia, Sri Lanka, and Mauritius) as buyers and a small amount of interest in some countries with a domestic mining industry (like the Philippines). Gold has been sold by the United Kingdom, Australia, Norway, Switzerland, France, the Netherlands, Belgium, Austria, the United Arab Emirates, Sweden, Canada, and Portugal. Furthermore, this list is far from complete.
Despite the fact that this list of sellers is largely Eurocentric, they are also the nations with the most gold holdings and reserves generally. After Australia, Switzerland, and the UK announced plans to dispose of gold, central banks were generally viewed as sellers in the 1990s. However, this activity is no longer regarded as an overhang because the European central bank Gold Agreement successfully removed this uncertainty. In point of fact, the market views the central bank's selling of 400 tonnes in accordance with the current agreement—which reached its peak at 500 tonnes—as contained in the gold price. It is more interested in finding gaps in this number; in other words, if that number is not reached, it is viewed as a bullish signal.
China and Russia are the only central banks that have increased their gold reserves in any meaningful way since late 2009, despite all speculation and rumors to the contrary. It was assumed that domestic production was the source of the increase in both instances. However, the Reserve Bank of India's announcement in November 2009 of a gold purchase—more on this later—attracted the market's attention and sparked a great deal of thought about which other institutions would purchase gold and the effectiveness of gold as a portfolio diversifier or "insurance policy."
