World Gold Council 2019-Central Bank Gold Reserve Survey

The 2019 Central Bank Gold Reserves (CBGR) survey points to continued robust central bank demand for gold in the short and medium-term.

11% of emerging market and developing economy (EMDE) central banks surveyed say they intend to increase their gold reserves over the next 12 months. This is similar to last year’s purchases, when 12% of the world’s 155 EMDE central banks bought gold. This gave rise to 651 tonnes of central bank gold demand, the highest level on record under the current international monetary system. The planned purchases are being driven by higher economic risks in reserve currencies.

In the medium term, central banks see changes in the international monetary system, with a greater role for the Chinese renminbi and gold. 39% of EMDE central banks cited anticipated changes in the international monetary system being relevant to their decision to hold gold.

International reserves

The level of international reserves held by central banks increased sharply after the 2008 global financial crisis and remains elevated today. Seven out of ten central banks surveyed say they are holding a higher level of total reserves than five years ago. 62% of EMDE central banks say this is mainly as a buffer against balance of payments crises. Exchange rate and monetary policy considerations are more important in advanced economies.

Over the next five years, participants see a growing role for the Chinese renminbi and gold in international reserves. In Q4 2018, the US dollar accounted for 55% of total reserves, the euro 18%, gold 11%, and the renminbi 2%. Over three-quarters of all central banks expect the renminbi’s share to increase over the next five years.

A third expect this shift to be substantial, with the renminbi’s share predicted to grow to 6-10%. Two-thirds of central banks expect gold’s share to remain the same or to increase in five years’ time. 56% of respondents expect the US dollar’s share of reserves to remain in the region of 51-60% in five years’ time, while one third expect its share to fall. Views on the euro are mixed, with half of respondents expecting the euro’s share of total reserves to remain unchanged in five years’ time, 26% expect it to increase and 15% expect it to decline.

Motivations and intentions

Four in five central banks surveyed hold gold as part of their international reserves. This is the same for advanced economy central banks and EMDE central banks, but their motivations for holding gold differ. When asked to rank the relevance of factors underpinning their decision to invest in gold, EMDE central banks put “long- term store of value” and “lack of default” in first and second position respectively. Gold’s role as “an effective diversifier” ranked joint third with “historical position”. Advanced economy banks put historical position first, reflecting their high legacy stocks from the Gold Standard and Bretton Woods days.

Structural changes in the global economy are also important to EMDE central banks, with 39% saying anticipated changes in the international monetary system are relevant to their decision to hold gold.

In the next 12 months, 54% of central banks expect global central bank gold reserves to increase. But when asked about their own reserves, 74% report no plans to change gold reserves; 8% plan to increase gold reserves, 3% plan to reduce them and 15% are undecided. EMDE central banks report slightly higher intentions to both increase and decrease gold, at 11% and 4% respectively. This points to a similar pace of buying to the record levels seen last year when 12% of the world’s 155 EMDE central banks drove annual purchases of 651 tonnes. 21% of EMDE central banks say they are undecided, meaning if political and economic risk continues to grow, central bank demand could be even higher.

Managing gold reserves

Nine out of ten central banks surveyed say they manage gold separately from other reserve assets. A minority of emerging market and developing economy central banks (9%) include gold in the investment tranche.

More than half of the central banks surveyed (53%) buy gold in the global OTC market, 19% cite off-market transactions with other central banks or international organisations and 16% buy from local production.

The most common form of gold purchased is Good Delivery bars, with 75% of central banks buying gold in this form. 9% of central banks buy kilo bars, with this form slightly more prevalent in EMDE countries (13%).

The Bank of England remains the most popular location for storing gold, with 56% of central banks listing it as a custodian. Around a quarter mention domestic storage and the Bank of International Settlements. No central banks report having changed their storage arrangement in the past 12 months or plans to change it over the next 12 months.

Four in five central banks hold allocated gold accounts and two in five hold unallocated gold accounts. Two-thirds of central banks do not actively manage their gold holdings. For the third that do, deposits are the most popular instrument (62%) followed by swaps (38%).

In summary, this year’s survey signals another healthy year of central bank gold demand, driven by EMDE central banks. These banks continue to set aside high levels of precautionary reserve balances to protect against balance of payment crises. In the next 12 months, heightened economic risks in reserve currency issuing countries are seen as the main factor driving these purchases, but in the medium-term structural changes in the global economy may also play a role. EMDE central banks say anticipation of changes in the international monetary system are also a factor in their decision to hold gold.

Methodology

For the second year in a row, the World Gold Council has worked with YouGov, a public opinion and data company, to conduct a survey of central bankers’ attitudes towards, and operations in, the gold market. The questionnaire was primarily designed by the World Gold Council with YouGov providing additional questionnaire design consultation. Once the English language questionnaire was signed off, it was translated into four additional languages (Arabic, French, Russian and Spanish) in order to make the survey accessible to a wide audience.

The questionnaire was scripted and set up on YouGov’s secure survey system and was thoroughly tested prior to launching fieldwork. A test link was provided for the World Gold Council to also ensure they were happy with the way the survey had been implemented.

Unique anonymised links were provided to the World Gold Council to send to their contacts within central banks around the world.

All contacts in the sample frame were sent an email invitation on 22 May 2019 which provided some brief details about the project, a unique link to take the survey and contact details in case any queries arose.

Fieldwork concluded on 17 June 2019, with a total of 39 eligible responses out of 150 individual central banks contacted, representing a response rate of 26% amongst all contacted central banks. For reference, there are 186 institutions in the world that exercise typical central bank functions.1  The level of responses in 2019 is a notable increase from the 22 responses received in 2018.

Data in the report is shown both at the overall level and is also split between advanced economies, and emerging market and developing economies as defined by the IMF.2

Detailed results

Q1: Please indicate within which region your institution is located
28% of respondents are in advanced economies, while 72% are in emerging markets and developing economies.

Q1a: Is your institution holding a higher level of total reserves (foreign exchange and gold) now than it was five years ago?
Seven in ten central banks say that they are holding a higher level of total reserves than they were five years ago.

Q1b: Please indicate the reason(s) that your institution is holding a higher level of total reserves (foreign exchange and gold) compared to five years ago
For emerging markets and developing economies, the main reason for higher total reserves is to buffer against balance of payments crises. For advanced economies, exchange rate and monetary policy considerations are the main reasons.

Composition of total reserves (as of Q4 2018)

Q2a: What proportion of total reserves (foreign exchange and gold) do you think will be denominated in US dollars five years from now?
While the majority of central banks expect the proportion of total reserves denominated in US dollar to remain at a similar level (between 51-60%) in the next five years, nearly a third anticipate
a decline.
While the highest proportions of both advanced and emerging markets and developing economies anticipate the proportion remaining around 55%, sizeable proportions of both groups think
that the proportion denominated in US dollars will fall in the next five years (36% of advanced economies and 29% of emerging markets and developing economies).

Q2b: What proportion of total reserves (foreign exchange and gold) do you think will be denominated in euros five years from now?
Half of the central banks expect the proportion of total reserves denominated in euros to remain at a similar level (between 11-20%). A quarter expect this to rise, while 15% expect it to fall.
75% of emerging markets and developing economies expect the proportion of total reserves denominated in euros to either stay at the same level or fall. In comparison, 45% of those in advanced
economies expect this to happen.

Q2c: What proportion of total reserves (foreign exchange and gold) do you think will be denominated in renminbi five years from now?
Three-quarters of central banks forecast an increase in the proportion of total reserves denominated in renminbi over the next 5 years. The vast majority of both advanced and emerging market and developing economies agree that the proportion of total reserves denominated in renminbi will increase from 2% (82% of advanced economies and 75% of emerging markets and developing economies).

Q2d: What proportion of total reserves (foreign exchange and gold) do you think will be denominated in gold five years from now?
Two thirds of central banks either expect the proportion of total reserves denominated in gold to remain stable (10-15%) or increase over the next five years. There was no material difference between the advanced economies and emerging market and developing economies on this question.

Q3: Do you currently hold gold as part of your total reserves?
Around four in five of the central banks surveyed say that they currently hold gold as part of their total reserves

Q4: How relevant are the following factors in your organisation’s decision to invest in gold?
The motivations for holding gold differ between advanced economies and emerging markets and developing economies. Advanced economies have large gold holdings as a legacy of the Bretton Woods system, which accounts for “Historical Position” being the primary reason for holding gold.
Emerging markets and developing economy central banks cite gold’s long-term store of value as the top reason, while gold’s lack of default risk and its use as an effective portfolio diversifier are also main reasons. This perhaps highlights the fact that emerging market and developing economy central banks have much greater exposure to advanced economy sovereign debt and limited
options to diversify.
Another stark difference between advanced economy views and emerging markets and developing economy views is that a significant portion of emerging market and developing economies (39%) anticipate changes in the international monetary system as a reason to hold gold while no advanced economies focused on this. Furthermore, 17% of emerging market and developing economies see their gold holdings as part of a dedollarisation policy, while no advanced economies cited this.

Q4b: How relevant are the following factors in your organisation’s decision to not hold gold?
The small number of central banks that told us they do not currently hold gold were asked about the relevance of a variety of factors in their decision not to hold gold.
As this question is based on a very small number of institutions (n=8) we are unable to show the percentages, but we can provide the raw numbers to show some indication of which factors are most relevant (highly or somewhat relevant):
• Unsure how to value gold (6 out of 8)
• Not enough understanding of the market (6 out of 8)
• Higher volatility than other reserve assets (6 out of 8)
• Preference for better yielding or higher returning assets (5 out of 8)
• Ability to transact in large sizes (5 out of 8)
• Difficulty in accessing relevant data (4 out of 8)
• Not permitted under current investment guidelines (4 out of 8)
• Accounting-related issues (2 out of 8)

Q5: How do you expect global central bank gold reserves to change over the next 12 months?
The majority of central banks expect global central bank gold reserves to increase over the next year. 38% of central banks expect global gold reserves to remain unchanged but no central banks thought global gold reserves would decrease.

Q6: How do you expect your institution’s gold reserves to change over the next 12 months?
8% of central banks expect to increase their gold holdings in the next 12 months. A higher proportion of emerging markets and developing economy central banks (11%) expect to increase their
gold holdings. The majority of central banks do not anticipate a change in their gold holding level.

Q7: What factors are driving your institution’s plan to increase gold reserves in the next 12 months?
The small number of central banks that told us they anticipate an increase in gold reserves in the next twelve months were asked about the factors influencing these changes.
As this question is based on a very small number of institutions (n=5) we are unable to show the percentages, but we can provide the raw numbers to provide some indication of which factors are most important.
• Higher economic risks in reserve currency economies (3 out of 5)
• Re-balancing of reserve allocations to a preferred strategic level (2 out of 5)
• Rising political risk in advanced economies (2 out of 5)
• Higher risk of a global financial crisis (2 out of 5)
• Anticipation of a structural change in the international monetary system, resulting from the decreasing role
of the advanced markets’ currencies and the rising role of emerging market currencies in the reserve system
(2 out of 5)
• Expectations of ongoing low to negative yields in advanced economy debt (2 out of 5)
• Expectations of a rise in the gold price (2 out of 5)

Q8: Which of the following options best describes how you determined your gold reserves allocation?
Gold reserve allocations are primarily determined by the central banks’ boards or executives, or because it is a legacy historical asset – the latter is particularly relevant among advanced economies.

Q9: Which of the following options best describes how you manage your gold reserves?
The findings are very clear on the question of how central banks manage their gold reserves: nine in ten central banks that participated in the survey say it is managed separately from other reserve assets.

Q10: How do you purchase gold? Please choose all that apply.
Q11: In what form do you purchase gold?
The most common method for buying gold is on the global OTC market. For advanced economy central banks that chose “Other” in their approach to purchasing gold, the World Gold Council interprets it as the banks being inactive in buying gold since their gold stocks were formed a long time ago. The most common form in which gold is purchased is good delivery bars.

Q12: Where do you currently vault your gold reserves? Please choose all that apply.
Among those central banks who participated in the survey, gold reserves are mainly vaulted in the Bank of England. In addition, around a quarter mention domestic storage and the Bank for International Settlements.

Q13a: How, if at all, have your custody arrangements changed over the past 12 months?
Q13b: How, if at all, do you intend to change your custody arrangements change over the next 12 months?
Amongst those prepared to answer the questions on custody arrangements, there has been no change in the last year and they are not anticipating any change over the coming year.

Q14: How do you hold your gold reserves?
Q15: Do you actively manage your gold reserves?
81% of central banks have allocated gold accounts, whilst 38% have unallocated gold accounts. Meanwhile, a third of central banks actively manage their gold reserves.

Q16: Please describe how you actively manage your gold reserves
Although only based on a small number of respondents (n=13), the data suggests that central banks that actively manage their gold reserves are most likely to do so via deposits, this is followed by swaps.

Q17: How does your institution account for your gold reserves?
Those central banks that hold gold are fairly evenly divided over the question of how they account for gold reserves. Three different approaches are each selected by around one in five central banks. Clear differences are apparent between the advanced economies and emerging markets and developing economies on a number of the listed methods.

Courtesy: Retail Jeweller India News Service