But these declines have coincided with a 25% rise in gold prices over H1 2016, which has dramatically increased the value of central bank gold holdings. World official gold holdings of over 32,800t at the end of June were equivalent to approximately US$1.4trn – the highest value since Q1 2013, when average gold prices were around 30% higher than average Q2 levels.1
Russia (+38.4t), China (+25.9t) and Kazakhstan (+9.8t) remain the dominant driving forces behind this increase in global gold reserves. The quarterly total was impacted by China taking a pause in May, coinciding with a slowing in buying by Russia, before both resumed their recent rates of purchasing in June. Buying by other, predominantly emerging market, central banks were in more limited quantities over the quarter. Conversely, Jordan (-5.6t),2 Belarus (-2.5t) and Ukraine (-2.2t) were net sellers during the quarter, while Germany sold 2.7t as part of its ongoing coin-minting programme.
The first six months of 2016 proved to be a uniquely challenging time for reserve managers. The unprecedented prevalence of global negative interest rates was compounded in the second quarter of the year by the equally unprecedented uncertainty surrounding Brexit. Continued central bank purchases proved again that reserve managers view gold as such an important reserve asset, especially with respect to portfolio diversification and capital preservation. Such an environment also helps to highlight that gold is a high quality, liquid asset with no intervention risk.
The UK’s seismic decision to leave the EU sent shockwaves through financial markets at the end of the quarter. The British pound depreciated to its weakest level against the US dollar in 31 years, while Bank of England governor Mark Carney indicated UK monetary policy could be eased further in the face of a weaker economic outlook. The International Monetary Fund also revised lower its global growth forecast following the vote.3