Central banks will be net buyers of gold this year as they diversify away from the U.S. dollar, marking a reversal of a decades-old trend, global commodities investment fund BlackRock said on Monday in comments that helped drive bullion to fresh record highs.
Investment in gold by central banks has picked up recently, with India buying 200 metric tons from the International Monetary Fund, and Taiwan's central bank is studying whether to raise the amount of gold in its forex reserves, with China and South Korea also debating the issue.
BlackRock is one of the world's largest fund managers, boasting a total $1.4 trillion under management across all asset classes. It is manager and adviser to the U.S. Federal Reserve and its views can influence the direction of global markets.
Evy Hambro, who runs two of the world's largest commodities funds, BlackRock World Mining Fund and Gold & General Fund, gave an upbeat outlook for gold during a media briefing in Australia.
His forecast for net central-bank purchases of gold this year would, if met, mark the first year in two decades when the world's central banks bought more gold than they sold. They have been net sellers each year since 1988.
Gold stored in central banks worldwide has dropped more than one-sixth since 1989.
The most recent break-out in the gold price in U.S. dollars has caused most gold prices to start trending higher at the same time, Hambro said, adding that investors were now looking for gold to rise in other commodities as well as U.S. dollars.
When you start to see the price rising in a range of different currencies, it is a clear sign of a very strong market to come, he added.
Spot gold stood at $1,123.70 by 9:16 p.m. EST after touching $1,126.30 per ounce, a record, versus the notional New York close of $1,118.50, helped higher by Hambro's bullish outlook, according to financial broking group IG Markets.
Bullion has been on an upward spiral as a hedge against the U.S. dollar's weakness and rising inflation risks, traditional reasons to lap up gold.
Based on the dollar index of major currencies, the U.S. dollar has dropped 7.5 percent this year versus a 33 percent rise in the U.S. dollar gold price.
In other currencies, gold has not reached new highs since early 2009. In Australian and Canadian dollars and the South African rand, it peaked in February.
But Hambro said investors were now looking for price rises across all currencies as central banks built up their gold holdings and global supplies tapered off.
Gold's role is gathering a lot more attention in terms of risk diversification, he said.
By 1999 central bank selling was so commonplace that the big European banks signed a pact capping sales at 400 metric tons a year to keep the price from collapsing.
It worked. Gold has gone up just about every year since.
Hambro also said the high level of gold production in China, which has replaced South Africa as the world's biggest producer, was not sustainable, pressuring world supply.
China's output rose 13.49 percent in the first half of 2009 from a year earlier to 146.505 metric tons, according to the Ministry of Industry and Information Technology.
China is widely assumed to be buying domestic gold production after revealing in April it held 1,054 metric tons of gold, a jump of 76 percent from its last word on the subject six years earlier.
The Reserve Bank of India last month bought 200 metric tons of gold from the International Monetary Fund, and Sri Lanka's central bank governor told Reuters this month his bank had been buying gold for the past five or six months.
But not all banks are trading foreign currencies for gold.
Korea has the world's sixth largest foreign exchange reserves but ranks 56th in terms of gold holdings. Its governor has said it would not be easy for the bank to suddenly increase gold holdings because of the market impact.
Japan has kept its gold reserves steady at 24.6 million troy ounces since mid-2001. The Royal Bank of Australia has not bought any gold since selling two-thirds of its reserve in 1997.
Hambro also said U.S. demand for commodities was starting to show signs of recovery. This, along with stronger Asian demand, set the stage for a prolonged bull market, he added.
(Additional reporting by Bruce Hextall; Editing by Mark Bendeich and Clarence Fernandez)