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Central Banks Appear to be Selling Gold

  • Gold stored at the Bank of England has been trading at an unusually low price, typically a sign that central banks are shedding some of their holdings.
  • Central banks have long been expanding their gold holdings, according to the latest World Gold Council data, almost 456 tons was added in 2021 alone, to diversify reserves away from foreign currencies.

All the gold in the world may not be able to buy happiness, but it sure can buy a whole bunch of currency, dollars specifically.

And as the greenback continues to grow against other currencies, a peculiar spread in the tightly managed gold market has started to open up.

Gold stored at the Bank of England has been trading at an unusually low price, typically a sign that central banks are shedding some of their holdings.

The Bank of England contains 5,676 tons of gold, one of the largest stockpiles in the world, which it holds on behalf of other central and commercial banks.

In normal gold trades, spreads are usually quite tight, bought and sold between large institutions in bilateral trades at prices typically within just a few cents of the market rate, but in recent days, gold at the Bank of England has traded at spreads of as much as a dollar an ounce beneath benchmark London prices.

Such spreads typically occur when there is strong selling pressure for gold, for instance a central bank selling a sizeable amount of gold reserves to raise dollars or other currencies.

Central banks have long been expanding their gold holdings, according to the latest World Gold Council data, almost 456 tons was added in 2021 alone, to diversify reserves away from foreign currencies.

The Russian invasion of Ukraine and the freezing of Russian foreign assets has also made more central banks eager to ensure they have a base of foreign reserves outside of the dollar.

But the recent strength of the greenback has put many central banks in a Catch-22 as they need the dollar to shore up their own currencies to prevent imported inflation from making domestic price pressures worse.

With the dollar on track for its biggest annual increase in seven years, many emerging economies whose governments were big buyers of gold are now having to unwind those holdings to shore up their national currencies.

Gold prices have slipped by more than 12% since peaking in March and could be set to keep decreasing so long as the dollar remains strong and yields are elevated.

 

 

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