Central banks around the world have been accumulating gold reserves at a record pace, reflecting the fragile and unbalanced nature of the global economic recovery. The demand for the precious metal has surged as central banks seek to diversify their portfolios, hedge against inflation and geopolitical risks, and reduce their dependence on the U.S. dollar.
Gold as a Safe Haven Asset
Gold is widely regarded as a safe haven asset that can preserve its value in times of uncertainty and turmoil. Gold is also a historical legacy asset that has been held by central banks for centuries. According to the World Gold Council, central banks held about 36,782 tonnes of gold as of September 2022, the highest level since November 1974.
In the first nine months of 2022, central banks bought a net 673 tonnes of gold, up 18% year over year and back to pre-pandemic levels. This was the highest amount of gold purchased by central banks since 1967, when they bought 1,404 tonnes under the Bretton Woods system that linked the U.S. dollar to gold.
The gold buying spree by central banks was driven by various factors, such as:
- The rising inflation and interest rates that eroded the value of fiat currencies and bonds
- The weakening of the U.S. dollar and the uncertainty over its future role as the global reserve currency
- The geopolitical tensions and conflicts that increased the demand for a neutral and universally accepted asset
- The diversification of reserves and the reduction of exposure to other assets, such as the Chinese yuan, the euro, the yen, and the pound
The Major Buyers and Sellers of Gold
The major buyers of gold in 2022 were mostly emerging market and developing economies (EMDEs) that sought to increase their gold reserves as a percentage of their total reserves. Some of the largest buyers were:
- Turkey, which bought 103 tonnes of gold till October, becoming the largest buyer of gold in 2022. Turkey faced high inflation, currency depreciation, and political instability, and sought to boost its gold reserves to support its economy and monetary policy.
- Egypt, which bought 44 tonnes of gold in the first quarter of 2022, more than any other central bank. Egypt was the first Arab country to buy gold in over 40 years, and aimed to diversify its reserves and enhance its financial stability.
- Russia, which bought 38 tonnes of gold in the first half of 2022, resuming its gold purchases after a pause in 2021. Russia has been one of the most consistent buyers of gold in the past decade, and has increased its gold reserves to reduce its reliance on the U.S. dollar and to counter the sanctions imposed by the West.
- Kazakhstan, which bought 28 tonnes of gold in the first half of 2022, continuing its steady accumulation of gold since 2010. Kazakhstan has the largest gold reserves among the Central Asian countries, and has been increasing its gold holdings to diversify its reserves and to support its domestic gold mining industry.
On the other hand, some of the major sellers of gold in 2022 were mostly advanced economies that sought to reduce their gold reserves as a percentage of their total reserves. Some of the largest sellers were:
- Uzbekistan, which sold 35 tonnes of gold in the first half of 2022, becoming the largest seller of gold in 2022. Uzbekistan has been selling its gold reserves since 2018, as part of its economic reforms and liberalization of its currency regime.
- Germany, which sold 8 tonnes of gold in the first half of 2022, as part of its regular sales to mint gold coins. Germany has the second largest gold reserves in the world, after the U.S., and has not changed its gold holdings significantly since 2007.
- France, which sold 5 tonnes of gold in the first half of 2022, as part of its regular sales to mint gold coins. France has the fourth largest gold reserves in the world, after the U.S., Germany, and Italy, and has not changed its gold holdings significantly since 2009.
The Outlook for Gold Demand
The outlook for gold demand by central banks remains positive, as the global economic recovery is still unbalanced and uncertain. The Covid-19 pandemic, the Omicron variant, the supply chain disruptions, the energy crisis, the inflationary pressures, the monetary policy shifts, and the geopolitical tensions are some of the factors that could influence the demand for gold in the coming months and years.
According to the World Gold Council, 21% of central banks intend to increase their gold reserves over the next 12 months, while only 4% plan to decrease them. The majority of central banks (75%) expect to keep their gold reserves unchanged.
The central banks that are likely to increase their gold reserves are mostly EMDEs that have low or moderate gold holdings as a percentage of their total reserves. Some of the potential buyers of gold are:
- India, which has the 10th largest gold reserves in the world, but only 7% of its total reserves. India has been increasing its gold reserves since 2017, and has expressed its interest in joining the International Monetary Fund’s gold agreement, which sets the limits and transparency for gold sales by central banks.
- China, which has the 6th largest gold reserves in the world, but only 3% of its total reserves. China has been increasing its gold reserves sporadically since 2009, and has not reported any change in its gold holdings since 2019. China may resume its gold purchases to diversify its reserves and to support its ambition to internationalize its currency.
- Brazil, which has the 52nd largest gold reserves in the world, but only 1% of its total reserves. Brazil has been increasing its gold reserves since 2012, and has bought 41 tonnes of gold in 2021, the largest amount since 1998. Brazil may continue to buy gold to hedge against inflation and currency depreciation.
The central banks that are likely to decrease their gold reserves are mostly advanced economies that have high or excessive gold holdings as a percentage of their total reserves. Some of the potential sellers of gold are:
- The U.S., which has the largest gold reserves in the world, and 79% of its total reserves. The U.S. has not changed its gold holdings since 1971, when it abandoned the gold standard. The U.S. may consider selling some of its gold to reduce its fiscal deficit and debt burden, or to support its allies and partners.
- Italy, which has the third largest gold reserves in the world, and 71% of its total reserves. Italy has not changed its gold holdings since 1999, when it joined the European Union. Italy may consider selling some of its gold to reduce its fiscal deficit and debt burden, or to support its economic recovery and reforms.
- Switzerland, which has the 8th largest gold reserves in the world, and 42% of its total reserves. Switzerland has been selling its gold since 2000, when it amended its constitution to allow the Swiss National Bank to manage its gold reserves independently. Switzerland may continue to sell its gold to maintain its exchange rate policy and to support its humanitarian and development aid.
Gold is likely to remain an important and attractive asset for central banks in the foreseeable future, as the global economic recovery is still fragile and unbalanced. Gold offers central banks a unique combination of benefits, such as:
- Liquidity: Gold is one of the most liquid and traded assets in the world, with an average daily volume of $183 billion in 2022. Gold can be easily bought and sold in the global market, or used as collateral or swap in times of need.
- Diversification: Gold has a low or negative correlation with most other assets, such as stocks, bonds, and currencies. Gold can help central banks to diversify their portfolios and reduce their risk and volatility.
- Hedge: Gold is a proven hedge against inflation and currency depreciation, as it tends to retain its purchasing power over time. Gold can help central banks to preserve their wealth and protect their sovereignty.
- Neutrality: Gold is a neutral and universally accepted asset that does not depend on any country or institution. Gold can help central banks to avoid political and economic interference and to enhance their credibility and independence.
