Central banks’ gold demand could remain subdued in 2017

The latest data show that central banks’ holdings of gold were broadly unchanged in November. However, year-to-date purchases remain substantially lower than in 2015 and this weakness could persist through 2017. The pace of the official sector’s purchases of gold undoubtedly slowed in 2016. Higher prices was probably the reason behind the weakness in purchases. However, we think that the case for gold as a strategic reserve asset remains strong. In particular, we continue to expect central banks from developing economies to be the main source of demand from the official sector in the future, as they typically have much lower gold holdings as a percentage of total reserves compared to those in advanced economies. What’s more, with around a third of global government debt yielding negative interest rates, central banks are likely to turn to gold to optimise their reserves, particularly if we are right and gold prices actually fall this year.