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Why the world's central banks are gobbling up gold

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Central banks buy gold The world's central banks are loading up on gold as they diversify their holdings.

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A report released today by the World Gold Council showed central banks acquiring almost 150 tonnes in the third quarter, marking the heftiest purchases in decades.

"Activity among central banks continued to fulfill our expectations of further purchases in [the third quarter]" the group said.

"In fact, net buying accelerated notably during the quarter - totalling 148.4 tonnes - as the issues surrounding the creditworthiness of western governments' debt seeped into the official sector. A number of banks continued their well-publicized programs of buying, while a slew of new entrants emerged wishing to bolster their gold holdings in order to diversify their reserves. We see this trend continuing into 2012."

Central banks are looking for alternatives to the euro and the U.S. dollar in their reserves, according to senior currency strategist Camilla Sutton of Scotia Capital, and the trend has been into bullion over the past six to nine months.

While the World Gold Council doesn't name the central banks that are buying, Ms. Sutton said they are largely in emerging market countries whose reserves are climbing. It's not that they're selling euros and American dollars, she said, but rather that "their reserves are growing so fast that gold is a natural place to go."

So far this year, said Marcus Grubb, the managing director of investment at the World Gold Council, central banks have acquired almost 350 tonnes, a record, and could take up to 450 tonnes before the year is out.

"This would compare to a net 76 tonnes in 2010, and net selling the year before," he said. "We expect central banks to continue diversifying their reserves and rebalancing towards a target weight in gold, with demand likely to be driven by central banks in countries with trade surpluses, primarily in Asia, central Asia and Latin America."

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Rio boosts bid Rio Tinto is fighting back against Cameco Corp. in its quest for control of Hathor Exploration Ltd.

Rio had struck a friendly deal with Hathor, to be topped by Cameco's $4.50-a-share offer. Today, The Globe and Mail's Brenda Bouw report, Rio fired back with a $4.70-a-share offer, valuing Hathor and its assets in Saskatchewan's uranium-rich Athabasca region, at $654-million.

Europe seethes Europe was a tinderbox today, its financial crisis deepening and protests mounting.

In Italy, demonstrators clashed with police and the country's new prime minister, Mario Monti, unveiled a fresh crisis plan. In Greece, where protests and strikes have been widespread, authorities have thousands of police officers on hand for another demonstration today.

Mr. Monti has taken a firm hold on the government, appointing a cabinet with no politicians. Today, all eyes were on his proposals for more bitter medicine. Mr. Monti certainly appeared to be taking the right approach. As our European correspondent Eric Reguly reports, Mr. Monti promised to focus on economic growth, which suggests he won't be as harsh in his measures as Greece has been.

"For the group, the honeymoon period will be short (or rather, non-existent), as the new cabinet will need to work quickly to restore investor confidence in the face of rising debt costs," said Carl Campus of BMO Nesbitt Burns. "Monti will lay out his policy platform today and then face a confidence vote in the Senate Thursday evening (followed by a separate confidence vote by the lower house on Friday)."

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In the markets, borrowing costs hit punishing highs again in what is unquestioningly a frightening new chapter in the euro zone's two-year-old debt crisis.

"Italian benchmark yields are back in the bailout zone, above 7 per cent, despite the installation of a cabinet of technocrat experts in Rome, while Spanish yields are heading merrily towards the same abyss," said Chris Beauchamp of IG Index in London.

"Ten-year yields were at 6.69 per cent before a bond auction that saw them soar to 6.97 per cent, right on the cusp of rescue territory. Even more worrying was the continuing rise in French bond yields, and while these might be nowhere near the danger zone, it reminds everyone that the next euro zone domino after Italy and Spain is France."

The spread between French and German 10-year yields climbed today to two full percentage points before narrowing somewhat, which reports said was the widest in more than two decades.

As Brian Milner writes in today's Report on Business, leaders of the 17-member monetary union have simply been unable to get a grip on the debt crisis. Two prime ministers have fallen in the past two weeks - Italy's Silvio Berlusconi and Greece's George Papandreou - but wary investors continue to push bond yields higher nontheless.

There are options available - action from the European Central Bank, a pan-Europe bond and a pledge for a tight-knit fiscal union - but deep rifts among the region's politicians indicate these are not likely to happen any time soon.

Blame Canada Target Corp. , Tiffany & Co. and other U.S. retailers may be loving Canada, but Sears Holdings Corp. isn't having much fun.

The retailer today posted a wider third-quarter loss, in part blaming both its Canadian operations and the Canada-U.S. exchange rate. The loss attributable to Sears climbed to $421-million (U.S.) or $3.95 a share from $2.18 or $1.98 a year earlier. (Adjusted EBITDA for Canada, which ranks right up there with Kmart, sank to a loss of $8-million from a gain of $58-million.)

"For the quarter, our gross margin declined $110-million to $2.4-billion in 2011," the company said. "The total decline was primarily driven by decreases in the gross margin rate at Kmart, Sears Domestic and Sears Canada and included an increase of $10-million related to the impact of foreign currency exchange rates on gross margin at Sears Canada."

EI claims fall Claims for Canadian jobless benefits have resumed their year-long decline after a temporary bump in August.

The number of unemployed collecting regular EI benefits fell 2.7 per cent in September, Statistics Canada said today. The number of initial and renewal claims fell by 10.5 per cent.

In the United States, initial claims fell last week to 388,000, the lowest since the spring.

"This has been a very good week for U.S. economic indicators," said senior economist Jennifer Lee of BMO Nesbitt Burns. "It started with the retail sales report, then industrial production, and now we can add UI claims and housing to the list. Now if only Europe's problems can be fixed, the world would be more optimistic."

Dumb, smart and arguably funny things 1. This is actually real: Apps for the European Central Bank's central banking game are now available on iTunes for the iPhone, iPod Touch and iPad. It's called €conomia: The Monetary Policy Game. The goal is to keep inflation just below 2 per cent. But here's how you play: Raise interest rates twice in the midst of a really big crisis, then cut once when you realize it was a dumb mistake and you're losing the game.

2. Tweet of the day, from @TonyclementCPC: "Good news: my Coldplay 'Paradise' #earworm has been replaced in my head by Rush's 'Fly By Night.'" Given that the Treasury Board President is responsible for finding ways to slash costs, and that his colleague Jim Flaherty has missed his target for balancing the budget, might I recommend Mr. Clement stick with Coldplay: Don't Panic, Help is Around the Corner, Up In Flames, Us Against the World, Why Does it Always Rain on Me, Careful Where You Stand, Warning Signs, and, of course, Fix You.

3. The pope really didn't like the Benetton ad that showed him kissing an imam on the lips. Benetton pulled the ad, though it protested that it was meant to "fight the culture of hate," but images are still floating around. According to Reuters today, the Vatican says it's going to launch legal action to stop the image from being distributed. Welcome to the Internet, folks.

4. Chief Executive magazine sent out a news release today with the jarring headline "4 CEOs beat Steve Jobs in creating value among S&P 500." It was to announce their annual findings of what CEOs did for their shareholders, and added that the late Mr. Jobs "was a visionary who created extraordinary value for shareholders - but four lesser-known CEOs were even more valuable over the past three years." It did note in the study that Mr. Jobs "ranks in the top 10 posthumously."

5. You can still hike naked in the Alps, but not, apparently, in front of children having a picnic near a Christian rehab centre for addicts, according to reports today. The Federal Supreme Court of Switzerland upheld a fine equal to about $100 against a man who was doing just that in what is known as the canton, or state of Appenzell Ausserhoden, Reuters reports. This region, where, according to the news agency, women won the right to vote just two decades ago, is apparently popular for naked walkers. But citizens got fed up with it and voted to ban it in 2009, according to the Swiss edition of The Local.

6. Of all the things to come out of the euro zone comes the best suggestion yet, The Wall Street Journal reports today. Germany's Economy Minister Philipp Roesler says politicial leaders should cut back on the number of summits they hold.

7. Most colourful commentary of the day, from Carl Weinberg of High Frequency Economics: "Northeast skiers over a certain age will likely experience a twinge of anxiety and a quickening of their pulse at the mere mention of the word 'Cascade.' For a generation of mogul bashers, a crash and bash at dawn down Killington's premiere triple-diamond Iceberg was the definitive way to establish cred on the mountain. An icy run down hard-packed Cascade was a journey fraught with danger and a high potential for disaster. Generation-X boarders and the three or four skiers left in Vermont nowadays have parallel challenges in places called 'Bear's Claw' and 'Outer Limits,' both of which may equal bits of Cascade for sheer terror but cannot sustain the pure fear of dropping straight down for as long and as far as the good old original. Thus, we are not only amused but also impressed - and appropriately terrified - by Treasury Secretary Geithner's choice of language in discussing the risks of euro land sovereign crises for the local and global financial markets as a scenario of cascading failures."

8. A smart move by the Occupational Safety and Health Administration, part of the U.S. Department of Labour, to remind stores about what they have to do to keep chaos to a minimum on Black Friday next week. OSHA has put out a statement and fact sheet on what stores should do to prevent injuries.

9. Leaving on a jet plane? Not so fast. The Daily Mail reports today that passengers on an Austrian airline flight from India to Britain had to stop and refuel in Vienna, where they had to fork over £20,000 to continue on. The BBC says the flight was grounded because of financial issues.

In Economy Lab Tepid economic growth is hampering the ability of Canadian businesses to raise consumer prices despite higher raw material costs, Rita Trichur writes.

In International Business In some respects, The Financial Times writes, Spain is in a healthier position than Italy, and won't be subverting its democracy with a stopgap technocratic government.

In Globe Careers Working on building your network and doing something you like can be more beneficial when unemployed than pounding the pavement or sitting at the computer endlessly refreshing, says Harvard Business Review.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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