Central banks in ‘gold rush’ to diversify reserves

(May 19, 2011 - MercoPress)

Mexico, Russia and Thailand added gold now valued at about 6 billion US dollars to their reserves in the first quarter of 2011 as metal prices advanced to a record, the dollar weakened and US Treasuries lost investors money.

Mexico bought 93.3 metric tons since January, increasing holdings from about 6.9 tons, according to data from the IMF and the Central bank later said it purchased 100 tons in recent months. Russia increased reserves 18.8 tons to 811.1 tons in March and Thailand expanded assets 9.3 tons to 108.9 tons in the same month, the data show.

Central banks are expanding their gold reserves for the first time in a generation as purchases by billionaire investors including John Paulson contributed to bullion extending its longest winning streak since at least 1920. Countries were also boosting their holdings in 1980 when gold rose to a then-record 850 USD an ounce, only to fall for most of the next 20 years.

“Central banks have good reason to buy gold,” said Peter Morici, a professor of business at the University of Maryland in College Park and a former economic adviser to the U.S. government. “The dollar is no longer a safe asset for backing currencies. Treasuries are not a sound investment” and budget and debt issues mean central banks should buy gold, he said. Gold has been hovering above 1,500 US dollars an ounce for the last month. The price is up 6.8% this year and has gained the past 10 years. Global holdings of gold by governments and official institutions such as the IMF stood at 30,523 tons by April, according to the World Gold Council.

Mexico’s purchase of 100 tons formed part of the central bank’s ordinary investment activities, and the gold represents about 4% of the nation’s international reserves, Banco de Mexico said in an e-mailed statement. “These purchases are part of the regular policy of this institution in regards to investment and diversification,” the statement said. Mexico’s international reserves have risen 11% this year to 125.8 billion USD, central bank data show.

Since the end of 2009, countries including India, Sri Lanka, Mauritius and Bangladesh have bought gold. Before this year’s purchases, gold accounted for about 0.2% of Mexico’s total reserves, and 2.6% of Thailand’s reserves. The metal accounts for more than 70% of reserves of the US and Germany, the biggest holders, World Gold Council data show.