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Why central banks stopped buying gold and ETF inflows plunged - Jeff Christian

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(Kitco News) - August saw a falloff in gold-backed ETF inflows along with central banks slowing down their purchases.

Central banks have always been price-sensitive, said Jeff Christian, managing partner of CPM Group, and would stop buying if the price of gold is too high.

As for exchange-traded fund (ETF) holdings, not all of the flows this year was from investment demand to begin with.

“It was clear to us that some bullion banks have been taking gold and silver, physical metal depositories, and selling that in exchange for newly issued shares of the ETFs, and so some part of that [gold and silver ETF inflows] wasn’t investment demand, it was banks disgorging physical silver and replacing it on their balance sheet with ETF shares,” Christian told Kitco News.

Because gold and silver are less liquid than fiat currencies, banks are hitting their value-at-risk limits with holdings of this asset class, and had to halt further purchases.

On central bank buying, countries have had different reasons for adding to their gold reserves, but they have all been tapering off gold purchases as the price of the metal rose this year.

“When the oil price war started between Saudi Arabia and Russia in April, and the price of oil fell, Russia stopped buying gold, and it hasn’t bought any gold since April. China doesn’t have the economic constrictions that Russia has, but it has been buying gold for several years and diversifying its portfolio. Gold is a very small portion of their reserves, but they’ve been buying consistently. They’ve pulled back and they haven’t bought any gold this year,” he said.

A large portion of global central bank purchases of gold this year came from Turkey, due to several geopolitical reasons, Christian said.

“It has sanctions from the U.S., it has troubles with the U.S., troubles with Europe, the French and the E.U. have now opened a dispute because Turkey wants to drill in disputed waters,” he said. “Turkey has a lot of reasons to want to own gold.”

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