CENTRAL BANKS ARE DOING SOME INTERESTING THINGS WITH GOLD AND FOREIGN EXCHANGE RESERVES / SEEKING ALPHA

Central Banks Are Doing Some Interesting Things With Gold And Foreign Exchange Reserves
     

by: Hebba Investments

Summary

 

- The Chinese central bank just increased its gold reserves by the most in six months during the month of November.

       

- This increase came despite the drop in foreign exchange reserves of almost $100 billion, which is highly unusual.

       

- Investors should follow what the Russian central bank does with its gold reserves as it issues its gold reserves for November over the next week.

- A few days ago the Chinese central bank released its gold reserve data that showed another increase in gold reserves during the month of November.

(click to enlarge)
Source: ShareLynx

During the month China added 20.98 tonnes of gold to its reserves during the month of November, which should show investors that China is still very interested in adding to its gold reserves despite bearish gold sentiment amongst Western investors. What is even more interesting is what happened to Chinese foreign exchange reserves during the same month.

(click to enlarge)
Source: ShareLynx

As investors can see in the graph above, Chinese foreign exchange reserves dropped by $87 billion dollars in November, but still the Chinese government chose to add the largest amount of gold to its reserves during that month.

This is a bit counter-intuitive for normal reserve management as countries normally choose to add to gold reserves during GAINS in foreign exchange to maintain portfolio allocations. To increase gold when total foreign exchange reserves are dropping is very unusual unless a country believes that gold is seriously undervalued or they want to increase gold as an allocation of total foreign exchange reserves.

Also, as we know from past coverage, China isn't the only central bank adding significant amounts to gold reserves. Russia has been very aggressively increasing gold reserves over the past few months and the latest data from October shows that the government is still intent on buying gold.

(click to enlarge)
Source: ShareLynx

In October Russia chose to add around 600,000 ounces of gold (a little less than 19 tonnes) during the month despite a plummeting oil price and a month where gold was over $1100 per ounce. We are very interested in seeing what the central bank has done in November in regards to its gold reserves as gold was much cheaper during the month, so investors should stay tuned for the Russian reserve data issued sometime in the next week.

Takeaways for Gold Investors

The continuing purchase of gold by the Russian and Chinese central banks despite the financial difficulties each country is going through should make it clear to investors that there are still some serious believers in gold. In our view this accumulation comes down to a single belief - that gold offers the central banks an asset that can preserve the purchasing power of its monetary reserves better than the other currency alternatives. To us that seems like the main reason why these governments would decide to transfer liquid, interest yielding, dollar-denominated bonds into less liquid, no-yield physical gold bars despite economic struggles.

Throw in the fact that the Fed is expected to start raising interest rates when it meets next week which should cause the value of existing bonds to drop, and central banks have even more of an incentive to turn to gold for foreign exchange reserves.

Thus long term investors should take this as a bullish factor and keep in mind the big picture when it comes to gold. We do not see a reason why investors should not consider having a large exposure to gold with positions in physical gold and the gold ETF's [SPDR Gold Shares (NYSEARCA:GLD), (NYSEARCA:PHYS), (NYSEMKT:CEF)]. Additionally, the miners that have been underperforming gold over the last few months may offer investors considerable leverage to any rise in the gold price.

Investors looking for this leverage may want to consider evaluating gold miners such as Goldcorp (NYSE:GG), Agnico-Eagle (NYSE:AEM), Newmont (NYSE:NEM), or even some of the explorers and silver miners such as Tahoe Resources (NYSE:TAHO) (we're not suggesting these companies specifically - only suggesting them for further investor research).

There is a reason why central banks continue to accumulate gold and investors should certainly keep this in mind the next time they read pessimistic research or financial news related to gold.