Gold Is Returning to Deficit, So Follow Putin’s Lead (Video)

While interviewing William Rhind of World Gold Trust Services, CNBC asked him why central banks around the world are buying so much gold. Speaking about Russia’s massive purchases this year, one host asked, “How long can you use gold to prop up your currency, ultimately?” Rhind politely set her straight that gold is not an asset used to simply “prop up” currencies. If he’d had more time, he might have pointed out how much value the US dollar has lost since it has been off the gold standard.

Due in part to central bank buying, Rhind believes that the global gold supply is returning to deficit. He predicts that 2014 might turn out to be the second highest year of gold demand on record.

Follow along with a partial transcript of Rhind’s answers:

Question: “How long can you use gold to prop up your currency, ultimately?”

“I don’t think that’s what they’re doing. It’s just a way of diversifying foreign exchange reserves, largely in dollars from selling oil on the open market. We talk about Russia, but of course the big elephant in the room is China. But we don’t know how large their accumulation has been of gold, because it’s a state secret. Of the banks that publish figures, we know that Russia has been the largest, most active in the central bank market. And that’s been a big driving force in terms of demand for gold.

[Central banks owning gold] is not too dissimilar from why anyone would own gold. If you own a portfolio that’s overweight US dollars, or it could be euros, or it could be any other number of asset classes – having an exposure to gold gives you some diversification, because of its lack of correlation to equities, bonds, and other asset classes. I think [central banks] are doing it for a very similar reason…

If you look at the gold market fundamentals, we think this is a metal that’s returning to deficit. We saw last year a big amount of supply come into the market, largely fueled by the ETFs. That cleared the lower price, largely bought by Asian consumers. On the back of what was the strongest year of demand on record for gold, this year we believe that we’re still going to have a very strong year in terms of demand. And we’ll probably come in the second highest on record in terms of demand.”

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