Sri Lanka purchased 10 metric tons of the IMF's planned gold sales. According to the central bank's announcement released last Thursday, it has been acquiring Gold from the international market over the past several months 'as a part of the diversification of the external assets portfolio'. The central bank believes the long-term stability of Sri Lanka's external reserves will be strengthened as gold holdings will provide 'a stable and long-term cushion against the impact of any potential volatility in major international currencies and financial instruments, in international financial markets'.
Sri Lanka was the third central bank in the world, as well as in Asia, to buy gold from the IMF this month. Earlier, the Reserve Bank of India and central bank of Mauritius purchased 200 metric tons and 2 metric tons, respectively, from the world lender.
Sale to Sri Lanka was announced shortly after Financial Chronicle's report that India may want to buy the remaining of the IMF's planned gold sales. This reinforced the notion that central bankers are seeking to diversify their reserves and gold is believed to be a good choice.
Apart from Asian economies, emerging markets such as Russia is also accumulating gold. Earlier this week, Bank Rossii, Russia's central bank, reported that it increased its gold holdings by +2.6% to 19.5 metric tons in October so as to raise precious metals' percentage in reserves.
According to Chairman Sergei Ignatiev, 'the central bank has in the course of several years replenished its supply of gold with the goal of diversifying our gold and foreign currency reserves'.
Bank Rossii First Deputy Chairman Alexei Ulyukayev said on November 18 that the central bank is ready to buy all gold (30 metric tons) that Gokhran, the precious metals stockpile in Russia, has planned to sell this year.
The events in Dubai have once again brought attentions to sovereign risk and this should drive investors to safe-haven assets. The sharp rebound in USD and selloffs of risky assets such as equities, emerging market assets, commodities and high-yield currencies were an indication of risk aversion. While investors may worry that strength in the USD will pressure gold, the yellow metal did outperform during times of sovereign crisis, even though the dollar strengthened,
EURUSD peaked in mid-July, 2008, as investors found out that the US was not the only economy that was facing financial crisis. In fact, the disaster was contagious and economies worldwide also suffered. USD began to rise against the euro. At that time, inflationary pressure was subdued due to recessionary fear and slumps in commodity prices. Interestingly, gold price surged against the backdrop. We believe the temporary breakdown of the gold's inverse correlation with the USD was mainly due to fear that the global financial system might fall.
While we believe the contagious effect of Dubai's bankruptcy to other emerging economies is not big, market sentiment is always the most important driving forces for asset prices. Therefore, should investors' concerns on the issue aggravate and risk appetite tumbles, there's chance for gold and USD to rally at the same time.
Comments