Central Bank Buying Means Gold to Rally to $2,000

Oct. 14 (Bloomberg) -- Gold may surpass $2,000 per ounce for the first time by early next year, as central banks in emerging markets add the precious metal to reserves to diversify away from the dollar, according to Mine Life Pty.

The CHART OF THE DAY shows the proportion of gold in the international reserves of India, Russia, China and Mexico is lower than the rates in the U.S., Germany and France, based on data compiled from the World Gold Council. The lower panel tracks central bank holdings in metric tons and the bullion price since March 2008. Central banks last year were net gold purchasers for the first time in two decades.

“I certainly expect international central bank gold buying to continue, especially in emerging economies where foreign reserves are growing,” said Gavin Wendt, founder and senior analyst at Sydney-based Mine Life, which publishes reports on the metals industry. “It’s the safest option for them.”

Immediate-delivery bullion has dropped 13 percent since setting a record $1,921.15 on Sept. 6. The metal is still up 18 percent this year, having outperformed equities and Treasury bonds because investors sought alternatives amid low interest rates and economic-slowdown concerns. The dollar, which mostly moves inversely to gold, was down 2.2 percent this year against a basket of currencies of six major U.S. trading partners by 6:22 p.m. in Shanghai yesterday. Bullion was at $1,671.99 an ounce at the same time.

Central banks, the biggest gold holders, have expanded reserves as bullion is headed for an 11th straight annual gain. Central bank and government-institution buying totaled 192.3 metric tons in the first half of 2011, World Gold Council data show. Gold accounts for 75.4 percent of the U.S.’s reserves and 72.7 percent of Germany’s. The ratio is 1.6 percent for China and 8.2 percent for Russia, WGC data show.

“Governments in many places like Asia and South America are rapidly embracing gold as a security mechanism,” said Wendt, who expects gold at $2,500 in 2013. “The value of their U.S. dollar foreign reserves has drastically fallen over the past decade.” Thailand, Bolivia and Tajikistan raised reserves in August, according to the International Monetary Fund.