Central banks provide a potential floor for the gold price

While a cyclical upswing may have diverted some investors to more risky assets, emerging market central banks have been keenly buying gold, providing some support to the gold price. World Gold Council data showed that official sector purchases of gold rose 29% year on year in Q4 2012 (and a full year rise of 17%).

The central banks of Russia, Mexico and Brazil were the key buyers. Despite the pledge by developed countries to “refrain from competitive devaluations” at the recent G20 meeting, emerging market central banks are likely to continue to acquire more gold to diversify their foreign exchange reserve holdings, given the unintended consequences of persistent loose monetary policy on the value of major reserve currencies.

The bottom line

1. Gold is attractively valued as macro risks linger

2. Technical sell-off gained momentum as the market misinterpreted Fed minutes again

3. Gold rebounded driven by investor belief that central banks remain committed to providing expansionary monetary policy until a persistent improvement in economic activity is seen

ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)