Why Do Central Banks Buy Gold?

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Central banks hit 2022 quarterly record for buying gold

  • Central banks scooped up nearly 400t of gold during the September 22 quarter
  • Experimental monetary policy created market imbalances
  • Inflation concerns lead central banks to gold
  • A bar of gold always keeps its value – crisis or not.
  • Central banks hold 36,000 tonnes of gold.

Central banks are responsible for the value of a country’s currency, which is susceptible to swings and market fluctuations.

Why do they by Gold?

The Gold metal is frequently viewed as a “safe asset” because of its durability, scarcity, and limited supply, which are thought to give central banks assurance and trust during times of uncertainty and market turbulence and help them create “critically stable assets” in their reserves.

The principal use of gold for central banks is to diversify their holdings. The banks are in charge of their countries’ currencies, although they can fluctuate in value depending on how strong or weak the underlying economy is thought to be. Since interest rates, the usual tool for controlling the money supply, has been stuck at or near zero for over a decade, banks may occasionally be obliged to print more money. It may be necessary to expand the money supply in order to prevent economic unrest, yet doing so will devalue the currency. Contrarily, gold is a tangible good with a limited quantity that is difficult to expand. It serves as a natural defence against inflation as a result.

Along with government bonds, gold is one of the most important reserve assets globally since it bears no credit or counterparty concerns and functions as a source of trust in a nation and in all economic circumstances.

Another aspect of gold’s attraction is that it has an inverse relationship with the US dollar, another important reserve asset. Gold often increases when the value of the dollar declines, allowing central banks to safeguard their holdings during volatile market conditions.

Based on a study by the World Gold Council, the top four reasons central banks own gold are:

  • Long-term store of value
  • Historical position
  • Performance during times of crisis
  • Effective portfolio diversifier

Important central bank leaders have spoken out about the significance of expanding their gold holdings.

The De Nederlandsche Bank (DNB – Central bank of the Netherlands) said in 2021:

‘A bar of gold always keeps its value. Crisis or not. That gives a safe feeling. The gold holdings of a central bank are therefore a beacon of confidence.’

Similar sentiments were expressed by the National Bank of Poland, with Bank Governor Adam Glapinski stating the reasons for owning gold were clear:

‘Gold is characterised by a relatively low correlation with the main asset classes – especially the US dollar dominating the NBP reserve portfolio – which means that including gold in the reserves reduces the financial risk in the process of investing in them.’

PWD Gold

Central banks hold 35,500 tonnes of gold

In 2021, central banks contributed 463 tonnes of gold to their worldwide holdings, an 82% increase over the 255 tonnes purchased in 2020. The world’s central banks’ gold reserves have risen to slightly under 36,000 tonnes, the highest level in 31 years

While the United States has the highest dollar value and tonnage position in gold, East Asia has the most significant proportion of its foreign exchange reserves in gold.

Central banks are stocking up on gold

During the quarter, Turkey was the top gold buyer, followed by Uzbekistan (26.13 tonnes) and India (17.46 tons). It is difficult to determine how much gold was bought during this time period by countries like China and Russia because they don’t all consistently publish their gold purchases.

A record 399 tonnes of gold were purchased by banks during the third quarter of this year (2022) for around $20 billion, helping to increase worldwide demand for the metal to 1,181 tonnes, a 28% increase from the 922 tonnes purchased during the previous similar period.

The June quarter contributed a sizable portion of the year’s demand, establishing a record of about 400t and pushing central bank nett purchases to 673t, the highest level of any whole year since 1967.

According to the WGC, central banks increased the world’s gold holdings by a nett 59 tonnes in June alone, with Iraq purchasing 34 tonnes of that total.

The banks increased their reserves by 35t in the previous month, with Turkey (13.3t), Uzbekistan (9t), Kazakhstan (6.3t), and India (3.8t) accounting for the majority of the major increases.

The amount, which reportedly equals about one-fifth of all gold ever produced, shows how popular the yellow metal is all across the world.

Top 10 Central Bank Gold Holdings (Updated 2022)

Which nations have the most metal on hand?

With holdings exceeding 35,500 metric tonnes, global central banks own roughly one-fifth of all gold ever mined (MT). Since becoming nett buyers of the metal during the past ten years, they have bought the great bulk.

According to a survey conducted by the World Gold Council (WGC) in mid-2022, 61 per cent of central bankers believe that the world’s gold reserves will rise during the ensuing 12 months. The “long-term store of value” of the precious metal was highlighted by nearly three-quarters of respondents as an important consideration when making gold purchases.

In 2022, central banks are anticipated to continue to be net gold buyers. Compared to last year, 24% of respondents to the WGC survey said they planned to increase their gold holdings. No responders, for the second year in a row, said their institution intended to cut back on its gold holdings.

The WGC does, however, point out that there may be a “gap between central bank respondents in advanced nations and those in Emerging Market and Developed Economies” due to the economic and geopolitical instability caused by the COVID-19 outbreak and Russia’s war in Ukraine.

Which central banks have the most gold holdings?

1. United States

8,133.5 MT

The American central bank holds the most gold reserves, 8,133.5 MT, making it the largest. A sizable portion of the US gold reserves, estimated at $528 billion, are kept in “deep storage” facilities at Denver, Fort Knox, and West Point.

According to the US Treasury, “that portion of the US Government-owned gold bullion reserve which the (US) Mint keeps in sealed vaults that are examined annually by the Treasury Department’s Office of the Inspector General and consists principally of gold bars” is what is meant by deep storage. The remaining US-owned reserves are kept as working stock, which is used by the nation’s mint as raw materials to produce coins that have been approved by Congress.

2. Germany

3,358.5 MT

Germany’s central bank, the Bundesbank, presently holds 3,358.5 MT of gold, which is less than half the amount the US has accumulated. The German National Bank maintains more than half of its inventory in foreign locations, including New York, London, and France, like many of the central banks on this list.

The Bundesrechnungshof, the German Federal Court of Auditors, publicly criticised the Bundesbank’s gold auditing in 2012, casting doubt on the Bundesbank’s foreign gold holdings.

The German bank responded by defending the security of foreign banks in a public statement. The Bundesbank then started the laborious task of returning its gold stock to German territory in secret. More than 583 MT has been returned to Germany by 2016.

The majority of Germany’s gold reserves are kept in Frankfurt, followed by more than a third in New York, an eighth in London, and a tiny amount in Paris.

3. Italy

2,451.84 MT

In 1893, following the merger of three distinct financial institutions into one, Banca d’Italia, Italy’s national bank, started to assemble its gold reserves. From there, its 78 MT gradually increased to the 2,451.84 MT the nation currently possesses.

Italy similarly keeps some of its reserves overseas. There are a total of 1,061 MT held by the US Federal Reserve, 149.3 MT in Switzerland, and 141.2 MT in the UK. There are 1,100 MT of gold stored in Italy.

4. France

2,436.5 MT

All 2,436.5 MT of the Banque de France’s gold reserves are kept on hand. The priceless metal is kept at La Souterraine, the bank’s safe underground vault, which is 27 metres below street level.

One of the four designated gold depositories of the International Monetary Fund is the gold vaults at La Souterraine.

According to Investopedia, former French President Charles de Gaulle “called the U.S. bluff and began actually exchanging dollars in for gold from the Fort Knox stockpiles,” which led to the Bretton Woods gold standard system’s demise. President Richard Nixon of the United States was “compelled to remove the United States from the gold standard, halting the dollar’s automatic convertibility into gold” at the time.

5. Russia

2,301.64 MT

The official central bank of the Russian Federation, the Bank of Russia, is the owner of 2,301.64 MT of gold. Russia’s central bank has chosen to keep all of its actual gold in domestic storage, similar to France. Two-thirds of the Bank of Russia’s gold reserves are kept in a bank building in Moscow, and the remaining third is kept in Saint Petersburg.

Large, variable-weight standard gold bars that weigh between 10 and 14 kilos make up the majority of the yellow metal. On-site, there are additional smaller bars that can weigh up to 1 kilogramme each.

The third-largest gold-producing nation, Russia, has been a consistent buyer of the precious metal since around 2007, with sales notably increasing between 2015 and early 2020. However, following its invasion of Ukraine, Russia’s refineries were forbidden from supplying gold bullion to the London market. Russia’s gold holdings have been frozen as part of western sanctions as well.

6. China

1,948.31 MT

The People’s Bank of China (PBoC), based in Beijing, is the country’s main financial institution. The majority of the 1,948.31 MT of gold kept by the national financial institute was acquired since 2000. The PBoC held 400 MT of gold in reserve in 2001; nevertheless, in less than 20 years, that amount has increased 487 percent.

The 1982-first-issued Panda gold coin is distributed by the PBoC. The Panda coin is currently among the top five central bank-issued bullion coins. It stands with the South African Krugerrand, Australian Gold Nugget, Canadian Maple Leaf, and American Eagle.

7. Switzerland

1,040 MT

The Swiss National Bank is home to the seventh-largest gold reserves among central banks. The 1,040 MT of gold in the reserve are owned by the state of Switzerland, but it is managed and preserved by the central bank.

The Swiss Gold Initiative, also known as the Save Our Swiss Gold campaign, was started in 2011 after the nation’s golden treasure trove had been shrouded in secrecy for years.

A national referendum with three propositions was held in 2014 as a result of the publicity. First, Switzerland was required to hold all reserve gold on a physical basis. The other two concerned the authority of the central bank to sell its gold holdings as well as a requirement that 20 per cent of the assets of the Swiss bank be retained in gold.

Despite the referendum’s failure, it did encourage the bank to be more open. The central bank stated in a 2013 release that 70% of its gold reserve was kept domestically, 20% was kept at the Bank of England, and 10% was kept at the Bank of Canada.

8. Japan

845.97 MT

It is difficult to find public information about the gold holdings of the Bank of Japan. The island nation had about 753 MT of the metal in its possession in 2000. The amount of gold held by the Bank of Japan increased to 765.2 MT by 2004 and stayed there until the nation bought 80.76 MT of gold in March 2021.

9. India

760.4 MT

Another central bank that has increased its assets recently is the Reserve Bank of India. Although it started increasing its gold holdings in 2017, the most of its purchases have been made in the last two years.

Business Standard stated that “while 453.52 tonnes of gold are held abroad in safe custody with the Bank of England and the Bank of International Settlements.” “There are domestic holdings of 295.82 tonnes of gold.”

10. Netherlands

612.5 MT

The Dutch National Bank (DNB), the country’s central bank, completes this ranking of the central banks with the largest gold reserves. Similar to Switzerland, the Dutch central bank keeps up to 38% of its gold in the national reserve of Canada. The remaining 31% is kept at the Federal Reserve Bank of New York, while the remaining 31% is held in a domestic vault as 15,000 gold bars.

The DNB refers to gold as the ultimate safe-haven asset in a report. Therefore, central banks like DNB have typically kept a lot of gold on hand. After all, gold is the ultimate investment and the financial system’s anchor of trust. “The gold supply serves as collateral to begin anew in the event that the entire system crashes. Gold instils trust in the strength of the balance sheet of the central bank. That makes me feel secure.

*11. International Monetary Fund (IMF)

2,814 MT

The third largest in terms of physical size is the gold reserve kept by the International Monetary Fund. The substantial gold holdings were mostly accumulated in 1944, when the worldwide organisation was established.

“25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold,” it was decided in that first year.

Gold has been added to the International Monetary Fund since 1944 as a result of member nations paying off their debts. Nations may also trade gold for the money of another member state.

 

Securities disclosure.: I, Beat Süess, have no direct investment interests in any of the companies mentioned in this article.

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