Harvey and Erb wrote that emerging markets can support gold because the precious metal represents a smaller part of central bank reserves than developed nations.
Foreign central banks are “one of the more intriguing sources of incremental demand for gold,” says ConvergEx Group strategist Nicholas Colas. [Strategist: Why Gold ETFs Still Make Sense]
“Among emerging economies, for example, central banks are actively buying gold to add to their reserves. The trend is most noticeable in Russia and India, but increasingly in China as well. Press accounts placed China’s net gold purchases in 2011 at over 200 tons, doubling its position in one year,” he said in a recent report.
“And gold is clearly playing a role at the central bank level in these countries’ efforts to hedge such price increases,” Colas noted. “There is a popular saying on Wall Street – ‘Don’t fight the Fed.’ Why fight the Chinese, Russian and Indian central banks on gold? Like the Fed, they have much deeper pockets than you.”
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Full disclosure: Tom Lydon’s clients own GLD.