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General Investing

Central Bank Demand Propels Gold Prices

December 20, 2010

Investment demand for gold continues to increase, as central banks become net buyers of the commodity, which is forecasted to top $1,600 an ounce by 2012, says Jorge Beristain, an analyst at Deutsche Bank Securities.

“What we’re seeing now is emerging-market central banks stepping in as new buyers of gold for the first time, while developed-market central banks have stopped selling,” Beristain said. “So we’re seeing central banks going from a net supply position to a net demand position, and that could be termed as additional investment demand as well, and one of a more long-term nature.”

China, Brazil and Russia each hold less than 10% of their assets in gold, compared to two-thirds by central banks in developed markets, Beristain says. As these markets develop, gold demand is predicted to increase further.

“As emerging market countries become wealthier both from a balance of trade and simply continuing to maintain a relative similar percentage of gold, that could be a driver for increased gold demand,” Beristain said. “But additionally, we think that these central banks are re-evaluating how much gold they want to hold as a percentage of their overall assets, which could be a further driver.”

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