Latin America Goes for Gold

December 10, 2012 at 08:33


Central bank reserve managers are a conservative bunch: once they fix on a certain policy it can take a long time to change course.

They also tend to move in herds, with new ideas catching on by region.

In 2009, for example, China announced it had been buying gold and India purchased 200 tonnes from the IMF. Since then Thailand, South Korea, Sri Lanka and Bangladesh have all bought significant quantities for the first time in years, making Asian central banks the main driver of “official sector” purchasing.

Now the gold bug appears to be catching in Latin America.

The trendsetter was Mexico, which last year snapped up close to 100 tonnes in a couple of months. More recently Brazil, holder of the region’s largest international reserves,  has joined the party. In September and October, according to IMF data, the central bank bought 18.9 tonnes.

“We bought some gold,” Alexandre Tombini, central bank governor, confirmed to journalists recently in Brasília.

Yet Brazil appears to have much further to go: gold still accounts for just 0.8 per cent of its reserves of $379bn, the world’s eighth-largest. Of the 20 largest holders of international reserves, it has more gold than only Hong Kong and Malaysia.

Indeed, Mr Tombini acknowledged as much, saying that the central bank was “looking into this issue [of reserve diversification] on a current basis”.

The shift by Mexico and now Brazil could prompt some of their neighbours to reconsider gold as well.

A wave of gold buying among Latin American central banks is likely to be of less significance to the market than the trend in Asia has been, simply because a larger proportion of the world’s reserves are held by Asian countries.

Nonetheless, consistent buying by central banks – often through the Bank for International Settlements – is one of the main factors propping up the gold market. New buyers from Latin America could help maintain the current pace of roughly 500 tonnes per year – equivalent to the jewellery consumption of Europe and North America combined.

A few have already begun to dip their toes in. Paraguay bought 7.5 tonnes in July, while Argentina added 7 tonnes last year and Colombia purchased 2.3 tonnes.

But others have – so far – remained on the sidelines. Notably Peru, holder of the third-largest international reserves in the region at $61bn, has not bought the yellow metal since 2001. And Chile, with reserves of $40bn, holds less than one tonne of gold.

Pisco sours, anyone?