Central Bank Gold Buying Trend
Central banks have been actively and significantly increasing their gold purchases in recent years, according to a report by UBS. The sustained interest in gold by central banks is driven by its role as a hedge against inflation, a diversifier during market stress, and a credible asset in times of economic turmoil.
Motivated by Recent Events
The freezing of around $300 billion of Russian foreign holdings due to the Ukraine war has prompted central banks, especially from smaller countries vulnerable to Western sanctions, to boost their gold reserves. Despite not immediately affecting the dollar-based status quo, this trend reflects a shift in the perception of central bank sovereignty and emphasizes the need for reform in the international financial system.
Growing Reserves and Diversification Efforts
By the end of 2023, central bank holdings of gold totaled approximately 37,000 metric tons, accounting for 16.7% of total central bank foreign exchange reserves. While developed countries like the United States, Germany, Italy, and France hold the largest reserves, emerging markets such as Russia and China are rapidly accumulating gold, aiming to diversify their assets and reduce reliance on major currencies.
Reasons for Inclusion in Reserves
The World Gold Council’s survey of reserve managers highlighted gold’s long-term value, role as an inflation hedge, and absence of counterparty risks as key factors driving its inclusion in reserves. Additionally, gold’s daily liquidity and lack of default risk are crucial amid escalating public debts. However, discrepancies in reported gold purchases between the IMF and other sources suggest that some sovereign wealth funds may be underreporting their gold acquisitions.
Positive Outlook and Price Projections
UBS is optimistic about the future of gold, citing factors such as central bank demand, geopolitical tensions, high inflation, and potentially lower US interest rates. The firm expects gold prices to reach $2,600 per ounce by the end of the year and $2,700 per ounce by mid-2025. As a recommendation, UBS suggests a 5% gold allocation in a USD-based balanced portfolio for individual investors.
Insight: Central Bank Influence on Gold Prices
It is essential to consider the historical impact of central bank actions on gold prices. While current market dynamics differ from the mid-1960s when central banks sold gold to maintain the gold standard, central bank decisions still hold significant sway over gold prices. The ongoing trend of central banks buying gold could shape market dynamics in the coming years, especially as emerging market central banks intervene in currency markets to manage their currencies against the US dollar.
This additional insight underscores the complex interplay between central bank actions, gold reserves, and the overall gold market, offering a broader perspective on the ongoing trends in the acquisition and utilization of gold by central banks around the world.
