Thu, April 25, 2024

Central Banks & Gold

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Gold is an integral instrument in the financial markets. Bullion is an alternative form of investment during uncertain times and is a trader’s best friend. Due to the unique factors driving it, gold always accounts for a respectable position in the portfolio of numerous traders. Among the various elements driving gold is the central bank’s purchasing and selling of the metal. Gold has been a significant component in the reserves of economies for centuries and its appeal is exhibiting no signs of diminishing. As per Reuters, central banks now hold more than 35,000 metric tonnes of the yellow metal, about one-fifth of all the bullion ever mined.

One of the primary objectives of gold for the central banks across the world is to simply diversify their reserves. In simple words, the banks are first responsible for their currencies but these are subject to changes depending on the perceived appreciation or depreciation of the economy in question. During times of crisis or emergency, banks may be forced to inject more money into the economy due to interest rates being stuck at around the zero mark for most nations. This increase in circulation may be deemed as necessary to save the economy but it comes at the cost of the currency devaluing further. Enter Gold! It is a commodity whose supply can’t easily be added and is a common hedge against inflation forces. Therefore, central banks purchase the ‘safe haven’ instrument since it retains its value against currencies or declining bond prices. Likewise, traders do not rely on any particular issuer or government.

As per the World Gold Council (WGC), central banks purchased a staggering $70 billion of gold in 2022 – the most since the 1950s – as developing macroeconomic and geopolitical uncertainty drove the governments to accumulate and reserve the yellow metal. In hindsight, the Russian invasion of Ukraine, volatile financial markets, and mounting economic uncertainty forced central banks to purchase 1,136 tonnes in 2022. China was the forerunner driven in part by its growing need to deter itself from the greenback on the back of the rising political tensions with its counterpart.


The People’s Bank of China increased its reserves to 2,076 tonnes from December to May adding itself to a team of other banks that boosted the reserves of Turkey, India and Singapore. However, when the uncertainties of a post-Covid economic slowdown emerged, China began to slash purchases in spring, partly to finance an upcoming stimulus programme to improve its staggering economy.


According to WGC, Turkey followed selling 160 tonnes from March to May. Soaring inflation prompted consumers to purchase the precious metal forcing the central bank of Turkey to trim its holdings while curbing the imports of gold to develop a growing current account deficit. Turkey made a surprise return to the market in June boosting reserves by 11 tonnes to an aggregate of 440 tonnes. The sporadic nature of its purchases has stemmed from its need to tackle heightened inflation along with a financial crisis that has sent the currency into a tailspin. Traders have rushed to acquire gold forcing officials to ban gold imports to support the lira, its official currency.


In a recent revelation, the Bank of Russia has been accumulating the yellow metal with its holdings jumping by one million ounces as of March. This move helped to limit the effects of the western sanctions in the aftermath of its invasion of Ukraine thereby boosting the holdings to 74.9 million ounces. As per market analysts, gold is much harder to freeze in terms of movement than other liquid assets such as currencies. Following suit, China, India and Pakistan have also boosted reserves to be able to trade with Russia.

Diversifying Asset

The central banks of most of the emerging markets have been purchasing gold to diversify away from a slumping dollar as it can be exchanged into any currency like the euro, yuan or yen. Protecting from geopolitical and economic shocks is another strong reason for emerging and developed central banks to purchase gold. Eight central banks increased their gold purchases in May, led by Poland, China, Singapore, Russia, Iraq, India, the Czech Republic and the Kyrgyz Republic as per WGC.


Market pundits assess that countering strong recessionary headwinds, emerging nations will continue to accumulate bullion in the near to medium-term future. A recent survey concluded that these institutions have a strong interest in amassing the yellow metal to ward off currency and political risks including those developing from the Russia-Ukraine issue. Chinese purchases are also expected to gradually pick up in 2024 as the country has sufficient room to boost its reserves which stand behind the US with 8,133 tonnes and Germany with 3,354 tonnes. While the cause of the central banks buying gold may have changed over the decades, the reasons for holding the asset have changed little.  

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MARCH 2024

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