(Kitco News) - Central bank gold demand has been a key factor behind the precious metal's unprecedented rally this year, reaching consecutive record highs; however, a significant question remains: who has been buying all that gold?
While much of the gold buying is reported to the International Monetary Fund, a significant portion remains undeclared. In the second quarter, the World Gold Council stated that 67% of estimated central bank purchases were unreported. In the first half of this year, central banks bought a record 483 tonnes of gold.
According to one analyst, Saudi Arabia could be a major buyer of undeclared gold.
In a recent report, Jan Nieuwenhuijs, Precious Metals Analyst at Money Metals, speculated that Saudi Arabia has accumulated around 160 tonnes of gold since 2022.
He noted that traditionally, Saudi Arabia's gold imports have been sensitive to higher prices. In previous rallies, the nation would see a sharp drop in gold imports or even increases in gold exports.
However, since 2022, Saudi gold imports have steadily risen.
“Ever since the West immobilized Russia’s dollar assets in February 2022, those with diplomatic disagreements with the West are increasingly exchanging their dollars for physical gold. Saudi Arabia is the latest country—after China and Thailand—of which I have found cross-border trade statistics showing it has shifted from being price-sensitive to a price driver,” he said.
Nieuwenhuijs noted that the nation’s gold imports also align with the World Gold Council’s growing estimates of unreported gold buying.
In an interview with Kitco News, Nieuwenhuijs said that it’s not surprising that Saudi Arabia is keeping its gold holdings quiet as it remains an ally of the United States. Thereby, it doesn’t want to drive up the gold price too much, as that will give them “less bang for their buck” in future gold purchases.
Many analysts noted that when China started its 18-month buying spree in November 2021, the Chinese government was putting the U.S. and Western nations on notice that the U.S. dollar has some competition as the world’s reserve currency.
Political analysts have pointed out that since the U.S. weaponized the dollar against Russia due to the invasion of Ukraine, a line has been drawn between allies and opponents. Saudi Arabia sits right in the middle of that divide.
Back in the 1970s, Saudi Arabia helped to establish the “petrodollar,” transacting all oil purchases in U.S. dollars. Since then, Nieuwenhuijs noted that there has been military cooperation between the U.S. and Saudi Arabia.
However, in recent years, that connection to the West has weakened after the Middle Eastern country became a member of the trading bloc between Brazil, Russia, India, China, and South Africa (BRICS).
“Saudi Arabia and the U.S. have a very long-term, let's say, diplomatic relationship,” Nieuwenhuijs said. “So, it's very difficult for Saudi Arabia to just break that relationship overnight. It has to be very gradual. They have still been investing a lot of their surpluses in U.S. Treasuries, of course, but they have also bought a little bit of gold.”
As to how gold is being bought in secret, using unnamed sources, Nieuwenhuijs speculated that the country is working with bullion banks to make the purchases.
“Central banks often buy gold in Switzerland and London and have bullion banks pack and ship the gold to wherever the central banks want. This way, it shows up in cross-border trade data because the bullion banks have to deal with customs,” he said in the report. “To find out if SAMA shops for gold bars in the Swiss Alps, I have subtracted Saudi consumer demand from its net imports and compared the outcome (gold imported but not sold to consumers) to gross exports from Switzerland to Saudi Arabia. The result shows a strong match since Q2 2022, confirming SAMA has quietly been buying gold in Switzerland.”
According to some analysts who spoke to Kitco News off the record, it is difficult to verify Nieuwenhuijs's assumptions as bullion banks traditionally ship gold in one-kilogram bars, whereas central banks deal in larger 14-kilogram bars, which is a standard recognized by the London Bullion Market Association.
There is also precedent for central banks keeping purchases secret. Nieuwenhuijs noted that the last time the Saudi Arabian Monetary Authority updated its official gold reserves was in February 2008. It increased its reserves by 180 tonnes to 332 tonnes.
“Obviously, SAMA didn’t buy 180 tonnes in one month,” he said in the report.
China is another country known for its secret gold hoarding. In April 2009, the People’s Bank of China announced that it had bought 454 tonnes of gold over a six-year period. Then again, in 2015, the central bank said it bought 604 tonnes of gold over a three-year period.
Although China stopped reporting its gold purchases earlier this year, many analysts speculate that it has continued to buy the precious metal.
Although the U.S. dollar’s role as the world’s reserve currency has faced growing competition in recent years, Nieuwenhuijs said that it is not surprising that Saudi Arabia is keeping its gold holdings secret, as there is a lot of economic uncertainty.
Nieuwenhuijs pointed out that while there is much speculation surrounding the potential creation of a BRICS currency, it's unlikely to happen anytime soon. Despite the alliance, Nieuwenhuijs noted that BRICS nations don’t actually have a lot in common with each other.
Nieuwenhuijs said that he sees Saudi Arabia building a hedge against an unknown economic event.
“I don't think they're flying planes back and forth with gold to settle trade,” he said. “I think Saudi Arabia is in the early stages and just accumulating gold because it will eventually become part of a new system, to the detriment of the dollar.”
