Looking at Central Banks and Gold

When it comes to commodities, gold isn’t in the top two as far as volume being traded, but it holds a special place in the minds of traders because it has such an intrinsic value and history. At times, many nations have linked their currencies to it, and it still remains as a popular hedge against currencies all over the world. While most of the world’s currencies are now free floating, nations still hold stockpiles of gold in order to ward off catastrophic economic events. It’s more precautionary than anything else, but because governments have so much more buying power than other organizations and individuals, they have the power to influence the price of gold with their actions.

For this reason, it is valuable to look at which countries are buying gold, and in what volumes. The United States government’s central bank–the Fed–is by far the biggest holder of gold with over 260 million troy ounces in their reserve. China’s holdings have not been updated since 2009, and they remain a big X factor as nothing is really known about where they stand right now. The last figures from 2009 would place them in eighth internationally, so keep an eye on any news to determine how their actions will impact future spot gold prices.

One interesting thing to note is that the countries that are increasing their holding the fastest are the oil producing countries that were once part of the Soviet Union. Russia’s currency–the ruble–has been in freefall for months now, and the acquisition of more gold in the countries near it is a prudent precautionary measure. Kazakhstan, for example, has tripled their holdings recently. Interestingly, Ukraine’s holdings have remained unchanged. Because of political turmoil between Ukraine and Russia, this would indicate that either the situation is not as severe as once believed, or that Ukraine is unable to invest time and money in gold. This will be something to keep an eye on in the future. If the worst case scenario does happen in these countries, this will add a small measure of stability to their societies and help soften the blow. Russia is already the world’s fifth largest holder of gold, and an increase in their buying would indicate that they expect their economy to worsen. At the same time, it would drive up gold’s value. For short term traders, especially those in the binary options market, going short on the ruble versus a stable currency would be a good move, as would going long on the price of gold. Timeframes would need to be addressed by each trader, but the basic framework will at least be established and give you a good starting point.

One thing to remember, though, if you are trading gold short term is that the price you will be seeing in your binary options broker is the price of gold for immediate delivery, and those prices are not yet influenced by the long term approach that central banks are taking. So, if you do decide to trade gold as a binary, you should compensate for this fact by extending your expiry time a bit longer than you normally would–assuming that you will be using this information to help influence your decisions. This is more something that will affect the price of gold a month or even a year from now, and not necessarily within a few hours. This is why you can see things like gold’s price dropping on the spot market even though demand is clearly going up. One looks at short term impact while other sources look at long term.