During the question and answer period, Tekoa Da Silva, publisher of Bull Market Thinking, asked Draghi why central banks are so interested in gold pointing out that central banks have increased their holdings significantly over the last few years.
Draghi pointed out that before being the president of the ECB he was the governor of the Bank of Italy, which he pointed out has the fourth largest gold reserves in the world.
“It is fairly disproportionate to the size of the country,” he said. “But I never thought it wise to sell it.”
Draghi added that gold reserves also give countries some protection against fluctuations in the U.S. dollar. He also pointed out that risk diversification is the reason why countries, which a few years ago embarked on gold sales program have “substantially” stopped selling their reserves.
“The experience of some central banks that have liquidated their whole stock of gold about 10 years ago was not considered terribly successful,” he said.
Not only are central banks not selling their gold but they are also adding significantly to their reserves. A recent Bloomberg article reported that central banks will add as much as 350 tons of gold this year, which would be worth about $15 billion, citing the World Gold Council.
According to research from the WGC, Russia is the biggest buyer of the yellow metal and has expanded its reserves by 20% since 2011 when gold hit its record high of $1,921.51 an ounce.
While the U.S. dollar is not expected to use lose its place as the world’s reserve currency any time soon some analysts are expecting to see more countries diversify their holdings, which could lead to more demand for gold.
Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic adviser to Rosland Capital, said that the recent brinkmanship in Washington is helping to tarnish the reputation of the U.S. dollar.
“Central bankers may now have little choice about holding greenbacks – but over the years they will be more inclined to find substitutes . . . and this will probably include gold,” he said.
The U.S. dollar dropped sharply on Thursday, the day after U.S. Congress passed legislation to raise the debt ceiling until Feb. 7 and fund the government until Jan. 15. As of 4:04 p.m. EST, the U.S. dollar index was down 1% on the day trading at 79.661. One factor that drove the U.S. dollar lower was news that a Chinese rating agency downgraded U.S. debt overnight, according to several analysts and traders. Dagong Global Credit Rating trimmed the U.S. by one notch to A-minus from A, saying the agreement in Washington does not defuse worries about the U.S. deficit or improve the country’s ability to repay in the long term.
Analysts will now be waiting to see if Fitch also follows through with its threat to downgrade the government, which it made in a statement released Tuesday.
Millan Mulraine, director of U.S. research and strategy said that Fitch might wait until December for the conclusion of the bicameral conference before taking any action.
By Neils Christensen of Kitco News; nchristensen@kitco.com
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