In 2010, global central banks switched from being net sellers of gold to net buyers, amassing more than 30,000 MT of the yellow metal.
Global central banks hold more than 35,500 metric tons (MT) of gold in their reserves. Most of that supply has been amassed since 2010, when central bankers commenced a gold-buying spree.
Central banks were net sellers of gold before that time, selling roughly 4,426 MT of gold between 2000 and 2009. But for more than a decade now they’ve been net buyers, and in 2022 central bank gold reserves are at their highest level since 1990, according to the World Gold Council (WGC).
In 2019, approximately 605 MT were added to the vaults of national financial institutions, the second highest amount in 50 years. Despite the record-setting total, it was a decrease year-over-year. In 2018, the 50 year bar was set with 656 MT of gold purchased.
2020 marked a second year of declines, with additions of just 255 MT, falling significantly short compared to the same period in 2019. The drop off was attributed to a rapidly rising gold price, when values rose to a first-time high of US$2,074 per ounce. The price of spot gold had been holding in the US$1,500 range off of geopolitical tensions, but that changed when COVID-19 hit in earnest in March.
It’s worth noting that in 2021, central banks added 455 MT of gold to their holdings, marking a significant turnaround in demand after the decade low experienced in the year prior. In 2022, central banks are expected to continue their net gold buying streak. According to the WGC 2022 survey, 25 percent of respondents indicated plans to increase their gold reserves, up from 21 percent in 2021.
Central banks serve a few primary functions, including setting interest rates, regulating monetary policy and controlling the printing and circulation of coins and bills.
However, their most important task is to provide price stability to their national currency while preventing banking system collapse. This is achieved through controlling inflation — although as the present global economic crisis has shown, sometimes the fate of a country’s currency may be difficult for a national bank to control. This risk is part of the reason central bank gold buying has increased in the last decade.
As the Dutch central bank notes, “A bar of gold always keeps its value. Crisis or not. That gives a safe feeling. The gold holdings of a central bank are therefore a beacon of confidence.”
Why central banks purchase gold
There are three primary reasons why gold is the reserve commodity of choice for national banks.
1. To mitigate risk
Gold is a well-known safe haven investment prone to acting positively in times of uncertainty and market volatility. It is viewed as an asset that holds no liability, adding to its ability to mitigate risk.
American banker and financier JP Morgan is famously quoted as saying: “Gold is money. Everything else is credit,” highlighting another intrinsic benefit of gold, which is its sustained purchasing power.
Central banks look to purchase gold as a hedge against a weakening dollar or any other fiat currency.
Gold’s role as a portfolio or investment diversifier also aids in its ability to mitigate risk.
Central banks have therefore traditionally held large reserves of gold to safeguard their financial systems. In the case of a system collapsing, the gold supply provides the means to recover. In this way, gold instills confidence in the strength of the central bank and the financial security of the nation.
2. To hedge against inflation
Hedging against the effects of inflation is another reason why central banks buy gold. In its simplest terms, inflation is the rise in price of a basket of goods.
In order for inflation to not dramatically impact a country’s economy, the nation requires investments that are not tied to the dollar — enter gold and the other precious metals.
Many view gold as a barometer of the value of foreign exchange instruments. Gold’s rising value is viewed as evidence that currencies are becoming devalued.
3. To facilitate stability and growth
The primary function of central banks is to promote stability and foster economic growth. As currencies become increasingly devalued, banks must ensure their respective economies don’t flounder. As such, gold is used to control the size and speed of market growth.
Using Chinese and Russian central bank gold buying as an example, a Global Bullion report explains that emerging economies are especially exposed to free market excesses and use gold to offset the risk.
“Owning gold prevents these excesses from utterly driving currency and damaging industry,” it reads.
Which banks hold the most gold?
The US Federal Reserve tops the list of central bank gold buyers. The US holds 8,133 MT of the yellow metal, more than doubling second place Germany’s number of 3,358 MT.
Italy, France and Russia take the third, fourth and fifth spots, banking 2,452, 2,436 and 2,301 MT respectively. China and Switzerland hold the sixth and seventh positions with 1,948 and 1,040 MT.
Down the list with less than 1,000 tonnes each are Japan (8,455), India (760) and the Netherlands (612).
Where is central bank gold stored?
Most banks opt to store gold in their subterranean vaults, although some banks keep their physical gold in foreign reserves.
For example, of its 612 MT, the Dutch central bank has 15,000 gold bars, or 31 percent, of its gold stock on hand; 31 percent is held in New York’s Federal Reserve bank. The remaining 38 percent of the Dutch gold stock is kept in Canada’s central bank.
Central bank gold agreements
With stores exceeding 35,500 MT, central banks own one-fifth of all the gold ever mined (205,238 MT). In an effort to prevent a single bank from impacting the price of gold with a massive sell off, the Central Bank Gold Agreements were drafted.
The pact, which was signed in 1999 between major European central banks, caps the amount of gold any one bank can sell in a year. The first Central Bank Gold Agreement lasted five years and has been reaffirmed three times since then in 2004, 2009 and 2014. However, in 2019, the world’s central banks decided not to renew the agreement.
Are central banks being priced out?
Since central banks became net buyers of gold a decade ago, the price has increased 88 percent. In 2010, the price of an ounce of gold was US$1,096. At its peak in 2020, gold was selling for US$2,063.
After making the second largest net gold purchase (25 MT) by a central bank in Q1 of 2020, the Russian central bank suspended new gold purchases. Demand for gold by the Russian bank had been steady since 2006. At the time, weakening oil prices, rising bullion prices and the country’s already robust gold reserves were the likely reasons behind the buying moratorium.
However, the higher gold prices didn’t stop India and Turkey’s central banks from growing their gold holdings. In 2020, Turkey made the largest net purchase of gold, acquiring 198 MT, while India added more than 24 MT.
“One of the primary reasons (Turkey and India) have been adding gold to their holdings is the weakness in their domestic currencies, which they seek to hedge by purchasing dollar denominated gold,” noted CPM Group.
Gold prices have since pulled back from their all-time high, trading at the US$1,850 level in mid-2022. Increased concerns over another global financial crisis have central banks once again building up their gold reserves.
“The geopolitical situations are much more volatile and we don’t know how much longer this situation will persist,” said Shaokai Fan, global head of central banks at WGC, in an interview with Bloomberg. “What has happened is gold has proven its safe haven characteristics during that situation. That’s one aspect that central banks are considering.”
This is an updated version of an article first published by the Investing News Network in 2020.
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Securities Disclosure: I, Melissa Pistilli, hold no direct investment interest in any company mentioned in this article.
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