What’s Driving Central Banks to Record Gold Purchases — and Will It Last? (2024)

FAQs

What’s Driving Central Banks to Record Gold Purchases — and Will It Last? ›

The reasons driving central bank gold purchases — to diversify their reserves, improve their balance sheets, and gain liquidity from an asset without credit risk — likely won't change given today's increasing economic and geopolitical risks.

To hedge against inflation

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.

The other side: Central banks collectively bought more than 1,000 tonnes of gold for each of the past two years — a pace unprecedented in modern history. The People's Bank of China alone bought 225 tonnes of gold in 2023, worth some $15 billion at current prices.

Supply/Demand Dynamics

Geopolitical conditions and monetary policy influence gold prices, but only insofar as these factors impact supply and demand dynamics. Central banks can influence the price of gold by entering the gold market as distributors or buyers.

Central banks see gold as a long-term store of value and a safe haven during times of economic and international turmoil. Gold is considered a resilient investment. When interest rates fall, gold prices tend to rise, as bullion becomes more appealing than income-paying assets like bonds.

"In addition to monetary policy, geopolitical uncertainty is often a key driver of gold demand and in 2024 we expect this to have a pronounced impact on the market," the World Gold Council report said.

Waiting for an investment price to change favorably is always risky but is arguably more so for alternative assets like gold. And although the price of the precious metal has risen significantly in the past few years, it still may make sense to buy now.

China takes the lead

China has been the largest buyer among central banks, lifting its total gold reserves by 225 metric tons last year — making 2023 the country's highest single year of reported additions since at least 1977, the World Gold Council said.

China beats India again as the world's biggest gold buyer.

The profile of the most active central banks has changed, with the traditional economic powerhouses such as the U.S., Germany, France and Italy no longer buying more gold but instead retaining the substantial holdings they already have.

Who is manipulating gold prices? ›

Central banks can potentially manipulate gold prices in several ways: Gold Sales and Purchases: Central banks can create supply and demand pressures by actively entering the market as a buyer or seller. Gold Leasing: Central banks can lease their gold to commercial banks.

Central banks hold paper currencies and gold in reserve. As central banks diversify their monetary reserves (away from the paper currencies they accumulate and into gold) the price of gold typically rises.

Today, owning gold can act as a hedge against inflation and deflation alike, as well as a good portfolio diversifier. As a global store of value, gold can also provide financial cover during geopolitical and macroeconomic uncertainty.

The bottom line. It's probably not a good idea to convert all of your cash savings to gold. After all, doing so could make accessing cash a challenge if and when an emergency arises. On the other hand, chances are that you could benefit from allocating at least some of your investment assets to the precious metal.

Most experts recommend limiting your gold investment to 10% or less of your overall portfolio. The range between 1% and 10%, however, will often vary based on your age and overall investor profile.

But this time, he said, the bank is using foreign currencies to buy gold - effectively reducing its exposure to the USD and other currencies. Many central banks, including China, started acquiring gold after the US took the rare step of freezing Russia's dollar holdings under sanctions imposed on Moscow.

You can buy or sell precious metal bullion and coins from private dealers. The Fed neither buys nor sells precious metals.

Under the currency reforms enacted by Roosevelt, the federal government owns the gold and holds it as security for $11 billion in gold certificates issued, in book-entry form, to the Federal Reserve Banks. The Federal Reserve Banks use these certificates as a small fraction of the collateral for Federal Reserve Notes.

In the decades before the First World War, international trade was conducted based on what has come to be known as the classical gold standard. In this system, trade between nations was settled using physical gold. Nations with trade surpluses accumulated gold as payment for their exports.