Emerging markets central banks keep having to buy a lot of gold to diversify their sometimes massive currency reserves away from the dollar.
For example, Mexico just wrapped up a 93.6-ton bullion-buying campaign, paying $4.6 billion in the process.
This was the biggest month for official gold purchases in a decade, and there are hints of even bigger bullion sprees ahead.
China, notoriously, currently holds only about 1.6% of its capital reserves — roughly 160 basis points — in gold. This still represents around 1,000 tons of bullion, but compared to the massive hoards of other global economic giants, is still a relatively small allocation to the metal.
For example, the United States has around 8,000 tons of gold backing the dollar, while Germany has around 3,400 tons in its reserves. On an allocation basis, that is something like 72% and 67% holdings in gold, respectively.
While China has bumped up its gold holdings 130% since 2003, it still has a long way to catch up.
But in terms of sheer scale, every basis point of Beijing’s $2.6 trillion in foreign currency reserves that shifts into gold pumps $260 million into the precious metals market — multiply that by what it would take to achieve ton-by-ton parity with Germany, and you have the real reason gold and the SPDR Gold Shares ETF (NYSE:GLD) are long-term buys, and not bubbles.
Emerging Money provides insightful and timely information about the increasingly important world of Emerging Market investments. CNBC Emerging Markets Contributor Tim Seymour leads the team of Emerging Money to bring you cutting edge global news and analysis.
About Tim Seymour: Tim is a founder of Emerging Money. He is a founder and Managing Partner at Seygem Asset Management, and The Emerging Markets Contributor to CNBC. Seygem Asset Management focuses on investing throughout the global emerging markets asset class. With a view that emerging and developing economies will continue to outpace the economic growth and advancement of developed economies, Seymour has devoted a career to investing in the dominant markets of tomorrow, today. Seymour’s career has included significant experience in both alternative asset management (hedge funds) and capital markets, having launched two hedge funds, and built the largest Russian broker dealer in the USA. Seymour started his career at UBS, focusing on international credit (cash, swaps, forex) in a specialized hedge fund group (New York). Seymour completed the firm’s training program after graduating with an MBA in international finance from Fordham University. Seymour received his undergraduate degree at Georgetown University.