HardAssetsInvestor

Mike Norman, Hard Assets Investor (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Today we’ll be talking about central banks and their activity in the gold market. Here to talk about that is Ashish Bhatia, head of Government Affairs at the World Gold Council. Ashish, welcome to the program. Nice to have you.

Ashish Bhatia, head of Government Affairs, World Gold Council (Bhatia): Thanks. Great to be here.

Norman: So tell us what is going on with central bank activity in gold, which has really been heating up. We hear a lot of talk about China being involved in the gold market, India, and many different central banks. There seems to be a flurry of activity. Give us an understanding of what’s going on; why are central banks becoming active in gold now?

Bhatia: Sure. Central banks have indeed become net buyers of gold for the first time in about two decades. So they have been selling for a good period of time. Then, in the second half of 2009, they became strong buyers of gold. 2010, they continued that. 2011, they continued again. And for 2012, they’re set to exceed what they bought in 2011. It’s been a major shift in the gold market. To give you a sense of how to scope that change, central banks were selling to the tune of nearly 500 tons for almost two decades, which accounted for roughly 10 to 15 percent of mining supply on annual basis.

Norman: Five hundred tons annually?

Bhatia: Annually. So now central banks have shifted from the supply side of the equation to the demand, to about nearly the same tune, of around 500 tons of buying.

Norman: This is always very odd to me, because if you look at that, let’s say, from an investor or a trader perspective, they were selling tons and tons of gold in the mid-90s when the price was $250-$260 an ounce. And since 2009, when it’s $1,700, $1,800, $1,900 an ounce, they have decided to become buyers. That’s not very wise investing, is it?

Bhatia: Well, I'm not going to look at that in isolation of all the other things that are going on.

Norman: Well, what are they looking at? Obviously, they're looking at something very macro, very long term. There's a reason behind their move into gold, now, after having been sellers for 20 years. What do you see from them in terms of their rationale for getting into gold?

Bhatia: I think it starts with the concept of “the great moderation.” We were in this period of a lull. Inflation was very moderate. Economic growth was very strong across the world. The clouds had cleared out. The sky was blue. And everybody thought we’d figure it out—macroeconomics, and that things were looking quite rosy.

In that period, central banks were selling gold, because they had large stocks of gold. These European central banks had large stocks of gold from their legacy of the gold standard. And so they were selling that gold to diversify their portfolio into other interest rate products. And now, that great moderation has ended. There’s no question about it—everyone agrees that that was, in a sense, not a realistic period.