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Central Banks are Still Buying Gold and Here’s Why

by Daniel Brewton
Gold Buying By The End of 2023 By Central Banks

Central banks do play a pivotal role in shaping the economic landscape of a country. And in some cases of the other country too. In addition to managing monetary policy and currency stability, many central banks also actively engage in gold buying as part of their broader reserve management strategies. Gold, along with its enduring value and historical significance, has been a preferred asset for central banks seeking to diversify their reserves and mitigate various economic risks.

Historical Context:

The practice of central banks buying and holding gold dates back centuries. Traditionally, gold served as a foundation for monetary systems, providing stability and confidence in the value of currency. The Gold Standard, prevalent during much of the 19th and early 20th centuries, directly linked a country’s currency to a specific amount of gold, ensuring its convertibility. Although the Gold Standard has largely been abandoned, gold’s allure persists among central banks for different reasons.

Diversification and Risk Management:

Central banks often view gold as a reliable store of value without a counter party risk and a hedge against various economic uncertainties. In times of geopolitical tensions, economic downturns, or currency volatility, gold tends to retain its intrinsic value, making it an attractive asset for central banks looking to diversify their reserve portfolios. Gold’s lack of correlation with other financial assets provides a valuable risk management tool for central banks seeking stability in their reserves.

Maintaining Confidence and Credibility:

The presence of gold in a central bank’s reserves can enhance its credibility and foster confidence in the stability of the national currency. Even though the gold standard is no longer the norm, the perception of gold as a tangible and enduring asset can positively influence investor and public confidence in a country’s monetary policies.

Reserve Currency Diversification:

Some central banks strategically increase their gold holdings as a response to shifts in the global economic landscape. The desire to reduce reliance on any single reserve currency, such as the U.S. dollar (more on that later), has led central banks to diversify their holdings. By holding gold, central banks can lessen their dependence on a specific currency and enhance the overall resilience of their reserves.

Market Trends and Central Bank Buying:

In recent years, there has been a noticeable uptick in central bank’s gold buying activity. Emerging market economies, in particular, have been actively accumulating gold as they seek to bolster their reserves. Russia and China, for example, have significantly increased their gold holdings in a bid to reduce exposure to U.S. dollar assets due to fear of sanctions as well as enhance the stability of their reserves.

Challenges and Criticisms:

Despite the strategic advantages of gold buying, there are criticisms and challenges associated with this practice. Critics argue that gold does not provide a yield or income, unlike other assets like bonds. Additionally, the costs associated with storing and securing large quantities of physical gold can be substantial.

Most Notable Purchases in Past Year:

A significant chunk of the demand from central banks arose during the previous quarter, setting a record of nearly 400 tons that lifted central bank net purchases to date to 673 tons. This was a combination of steady reported purchases by central banks and a substantial estimate for unreported buying.

Case Studies

Turkey was the biggest buyer of gold during the quarter, followed by Uzbekistan (26.13 tons) and India (17.46 tons).

The Reserve Bank of India (RBI) bought 13 tons of gold in July and 4 tons in September, pushing its reserves to 785 tons. One reason for the RBI to embark on a gold-buying spree could be an attempt to diversify assets in which its foreign exchange reserves are parked.

Same way back In 2022, central banks bought a staggering $70 billion of gold – the most since 1950 – as heightened macroeconomic and geopolitical uncertainty drove governments to accumulate the precious metal. China led the trend, driven by its growing need to wean itself from the U.S. dollar amid rising political tensions with Washington. The People’s Bank of China boosted reserves to 2,076 tons from December to May.

Please note that the exact methods and reasons for buying gold can vary between different central banks and countries.

Reason Why They Keep Hoarding It Across The World

The strategic buying of gold by central banks is a multifaceted practice deeply rooted in economic history. As central banks navigate an ever-changing global landscape, the role of gold in their reserve portfolios remains an essential aspect of prudent reserve management. Whether viewed as a hedge against uncertainty, a diversification strategy, or a symbol of stability, gold continues to be a valuable asset for central banks around the world.

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