By Nicholas Larsen, International Banker
According to the latest figures from the World Gold Council (WGC), central banks stepped up their purchases of gold in May, marking the second consecutive month of clearly bullish sentiment for the yellow metal, thus adding to the long-term trend of central banks’ growing appetite for gold.
Having added a net 19.4 metric tons (t) of gold to their reserves in April, central banks added a further 35t in May, with the same banks largely responsible for the main additions during both months—Turkey (13.3t), Uzbekistan (9t), Kazakhstan (6.3t) and India (3.8t). Qatar also added 4.7t of gold to its reserves in May to replenish all of the gold it had sold earlier in the year, the WGC noted, while Germany was the only major country to be a net seller in the month, shedding its gold reserves by 2t.
All this means that 2022 is shaping up to be a year for considerable gold acquisition by many countries worldwide, particularly emerging markets. “Year-to-date, reported buying has been dominated by Turkey (56t), Egypt (44t) and Iraq (34t), and supported by more modest buying from a small number of other banks,” according to WGC’s senior analyst for EMEA (Europe, Middle East, and Africa), Krishan Gopaul. “And while we have seen a larger number of banks reduce their gold holdings so far in 2022, the total volume of sales is below that of purchases.”
As such, recent gold-buying activity extends a multi-year trend of central banks adding to their gold reserves. Last year saw them buy a net 463t, 82 percent more than they acquired in 2020 and the 12th year in a row in which they were net buyers. The WGC reported earlier in the year that central banks hold more than 35,000t of gold, equivalent to around one-fifth of all the gold that has ever been mined, further underlining their insatiable appetite for the yellow metal.
Why is this the case? Part of gold’s appeal is the diversification benefits it offers to central banks—and investors in general—especially given how vulnerable their respective currencies can be to bouts of pronounced volatility. And with quantitative easing proving an increasingly popular policy to combat economic crises in recent years, currencies have been even more under pressure in the face of massive injections into the money supply. In contrast to currency reserves, however, gold’s durability, scarcity and finite supply are just some features that provide central banks with surety and trust during times of uncertainty and market turmoil. As such, it provides them with crucially stable assets in their reserves. Gold also tends to have an inverse relationship with another global reserve asset—the US dollar—which means that central banks can load up on gold to protect the value of their reserves when the dollar loses value.
What’s more, emerging markets have been the ones stepping up their gold purchases most vociferously in recent times, not advanced economies. “The profile of the most active central banks has changed, with the traditional economic powerhouses such as the US, Germany, France and Italy no longer buying more gold but instead retaining the substantial holdings they already have,” the WGC wrote in a piece for Reuters published in February, noting that the United States and Germany hold the most gold, with more than 8,100 tons (78 percent of total foreign reserves) and 3,300 tons, respectively.
“In their place as purchasers of gold have stepped emerging economies such as Russia, China, Turkey and India,” the WGC added. “Yet despite the four countries buying substantial quantities of gold over the last decade or so, they still lag behind their Western counterparts, with gold representing just 22 percent of Russia’s reserves, while China’s holdings of just under 2,000 tons represent a mere 3 percent.”
And it would seem that additional bullion purchases are now on the agenda for central banks. Iraq’s central bank, for example, revealed that it had made its first significant gold purchase since September, adding 34 tons in June to bring its total gold reserves up to 130.39 tons and propel its ranking to 30th in the world and 4th in the Arab world. “It is noteworthy that gold is one of the most important assets held by central banks and international financial institutions, and a safe haven in conditions of uncertainty, due to its acceptance at the international level,” the Central Bank of Iraq added.
Poland and the Czech Republic—two eastern European nations—have also vowed to boost their gold holdings. Poland advised in October 2021 that it would buy 100t of gold in 2022. “Gold will retain its value even when someone cuts off the power to the global financial system, destroying traditional assets based on electronic accounting records,” Bank of Poland President Adam Glapiński said. “Of course, we do not assume that this will happen. But as the saying goes—forewarned is always insured. And the central bank is required to be prepared for even the most unfavorable circumstances. That is why we see a special place for gold in our foreign exchange management process.”
And the new Czech National Bank (CNB) governor, Aleš Michl, who took office in July, confirmed a month earlier that under his leadership, the bank would increase its gold holdings by almost tenfold, from 11 tons at present to 100 tons. “Yes, yield volatility would then be higher—that’s the risk. But the expected return, in the long run, would also be higher. Together with our CNB colleagues Michal Škoda and Tomáš Adam, we are trying to calculate this risk as part of a research project. My vision is to have a long-term profitable CNB,” Michl said, as reported by gold news site Kitco.
But not every country is participating in the ongoing gold-buying spree. Ukraine’s central bank deputy governor confirmed on July 17 that it had sold $12.4 billion of gold reserves since the outbreak of conflict with Russia on February 24. “We are selling (this gold) so that our importers are able to buy necessary goods for the country,” Deputy Governor Kateryna Rozhkova revealed. Of course, Ukraine finds itself in unusual, extreme circumstances, explaining its preference for being a net gold seller.
Nonetheless, a WGC survey of 57 central banks published on June 8 found that 25 percent of respondents confirmed that they expected to boost their gold reserves over the next 12 months, more than the 21 percent recorded in the same survey conducted a year earlier. “The planned purchases are chiefly motivated by increasing concern about a possible global financial crisis, although anticipated changes in the international monetary system and concerns over rising economic risks in reserve currency economies are also major factors,” according to the report.
The WGC also noted that of the 25 percent of central banks seeking to ramp up gold purchases, all of them are from emerging markets and developing economies (EMDEs). In total, 80 percent of all central banks included in the survey anticipate an expansion in their gold reserves within the next year. “More EMDE respondents regard ‘shifts in global economic power’ as a relevant factor in their reserve management decisions, which could indicate growing concerns over the threat of a decoupling between major economies amid ongoing tensions,” the report added. “EMDE central banks generally face greater challenges in maintaining orderly capital flows and currency stability. The results may indicate that these banks tend to view gold as a more important component of their overall reserve management strategy, especially at a time when there is a greater need for risk-mitigating assets.”
But perhaps the most interesting part of the survey is that there is a growing consensus among EMDE central banks: They are concerned about shifts in global economic power, thus causing them to be less optimistic about the US dollar’s role as a global reserve currency. Indeed, the survey noted that 42 percent of central bank respondents expect the US dollar to decline as a proportion of total reserves over the next five years. EMDEs’ central banks seem particularly wary about the greenback’s role, with 45 percent expecting the US dollar to decline as a proportion of their reserves, more than the 31 percent of the advanced economies’ central banks.