Why are Central Banks buying Gold?
In this blog I want to cover three things:
Key motivations for Central Banks buying Gold – basically – why might they be doing it.
The context and trends of their actions – have things changed
What the implications are of their actions.
This is only a blog and does not purport to go into each point in much detail, but hopefully you’ll find it useful and should you want to do some more research it might point you in the right direction.
Anyway, let’s kick off.
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1. What are some key motivations for Central Banks buying Gold?
Diversification of reserves
Central banks don’t want all their reserves locked up in foreign-currency assets (for example US dollars or government bonds). Holding gold adds a non-currency asset to the mix, which can reduce risk from currency fluctuations.
Hedge against inflation & currency devaluation
Since fiat currencies can lose value (through inflation, monetary expansion, or loss of confidence), gold becomes a way to protect the real value of reserves.
No counterparty risk / Safe haven asset status
Gold is a physical asset; it doesn’t depend on another party fulfilling a contract (unlike bonds) and isn’t subject to the same risks as digital/financial assets. In times of crisis, that becomes attractive.
Geopolitical/financial system risk and de-dollarisation
With rising geopolitical tensions, financial sanctions, and concerns about the dominance of the dollar-based financial system, some Central Banks are accumulating gold as a kind of “insurance”. Also, some are explicitly trying to reduce reliance on the US dollar.
Historical and confidence factors
Having significant gold reserves gives a symbolic and real demonstration of financial strength, which can help a country’s creditworthiness and economic credibility.
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2. What is the context and trends of their actions?
Over recent years, many central banks have shifted from being net sellers of gold (as earlier decades) to net buyers. You could therefore argue that there’s been a change in sentiment towards Gold.
Some reports indicate purchases are occurring at record pace. Here is an article you may find useful.Harvard Scholar
More up-to-date articles are on The World Gold Councils website.
You will probably have to register and then “sign in” to get access to the articles.
The shift in behaviour suggests central banks see increasing structural risks (monetary, geopolitical, financial) that gold helps mitigate.
3. What are the implications of their actions?
For the gold market
Stronger central bank demand supports higher gold prices because there’s more demand in the market. As you can’t print Gold when you run out…..you run out… there is a limited supply. It’s not unreasonable to expect higher prices if demand increases and supply is relatively fixed.
For currencies and reserves
It signals that some Central Banks are less confident in purely fiat reserve strategies or singular-currency reserve strategies. That’s not to say they won’t have them, but they may also want exposure to assets such as gold.
For investors
The institutional behaviour (Central Banks accumulating gold) may be seen as a signal of risk, or a hint to reconsider how much exposure to gold or other non-currency assets might be appropriate. A lot of investors have literally no exposure to Gold. It might be time to think about getting some.
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