Central Banks Increase Gold Purchases, Driving Market Shift
In a notable shift in behavior, Central Banks worldwide have significantly increased their purchases of gold over the past few years. This trend has culminated in Central Banks acquiring more than 1000 metric tons of gold each year in 2022 and 2023, doubling their average annual acquisitions from the previous decade.
This surge in gold acquisitions extended into the first quarter of 2024, with Central Banks purchasing 290 metric tons, marking a 12% increase over the average quarterly purchases in the previous two years. This increase represents the highest first-quarter purchase by Central Banks since data collection began in 2000, as reported by the World Gold Council (WGC).
The significant increase in demand for gold among Central Banks has led to them acquiring one-third of the world’s annual gold production since 2022. Additionally, a recent survey by the WGC covering 69 Global Central Banks revealed that 81% of respondents expect their gold holdings to increase over the next twelve months, reflecting a growing trend towards gold accumulation among Central Banks.
The top ten reasons cited by Central Banks for holding gold include its role as a long-term store of value, performance during times of crisis, effective portfolio diversification, lack of default risk, historical significance, and geopolitical diversification. Despite the overwhelming expectation for increased gold holdings among Global Central Banks, only 29% of Central Banks anticipate increasing their gold reserves while the majority expect their holdings to remain stable.
The shift in Central Bank behavior towards gold acquisitions highlights a divergence between Advanced Economies (AE) and Emerging Markets and Developing Economies (EMDE) Central Banks. EMDE Central Banks exhibit a higher level of concern about systemic financial risks and political risks, likely influenced by events such as the invasion of Ukraine in early 2022 and subsequent global financial and political repercussions.
BRICS nations, a group of emerging market economies including Brazil, Russia, India, China, and South Africa, have been prominent in driving the increased gold purchases. China, in particular, has significantly boosted its gold reserves, becoming the top buyer of gold since 2022. Russia, another BRICS member, also stands out as the world’s fifth-largest owner of gold reserves, strategically diversifying their holdings in anticipation of potential economic sanctions.
India and Brazil have equally expanded their gold reserves, with India showing a notable demand for gold in the retail sector, particularly jewelry. In contrast, China has financed its gold acquisitions by selling US Treasury Bonds, reducing its Treasury position over the years as its gold reserves have grown.
The resurgence in Central Bank demand for gold has led to a surge in the spot price of gold, reaching an all-time high of $2,425 per ounce in May. While the price has retraced slightly, the current level remains significantly higher than in previous years, presenting a challenge to traditional models that track gold prices based on factors like real rates and the value of the dollar.
The Central Banks’ focus on increasing gold reserves as part of their policy strategy has created a potential gap between the spot price of gold and its estimated value. The prolonged divergence may persist as Central Banks continue their purchases for policy reasons rather than value considerations, much like the impact of Quantitative Easing on government bond markets.
The heightened Central Bank demand for gold is reshaping the market landscape, with BRICS countries and other emerging markets leading the charge in diversifying their reserves away from the US dollar. The geopolitical and economic uncertainties globally are driving Central Banks to increase their gold holdings, signaling a continued upward trajectory for the price of gold in the near future.
This demand has pushed the price of the precious metal to new highs. Investors are looking to precious metals as a safe haven asset amid economic uncertainty and geopolitical tensions. The USA banks are likely to continue to play a key role in the precious metals market as they seek to diversify their portfolios and hedge against risk.