Why Central Banks Haven’t Bought This Much Gold Since 1967!

According to the World Gold Council, the world’s major banks purchased a net of 400 tonnes of Gold. This is 115% more than its acquisition in Q2 of this year and also four times more than the Gold acquisition in Q3 of 2021!

The current Gold demand is the greatest since the World Global Council series began. It has nearly doubled the previous Gold record of 241 tonnes in the third quarter of 2018. 

But all these developments pull up an intriguing question. Why are central banks buying up so much Gold? And what could this mean for global Gold prices?

This article is packed with insights into the recent Gold frenzy. We’ll also look at what to expect in the coming months, so let’s unravel this mystery!

But How Do Central Banks Buy Gold?

Until the economic crisis of 2009, central banks were net sellers of Gold. This was done to increase their holdings of US-dominated assets like U.S. treasury securities. 

But because of the economic crisis, Central banks shifted from being net sellers to net buyers of Gold. This happened for the first time in 20 years. 

Since 2010 though, central banks have been consistent net buyers of Gold. Just last year, central banks collectively bought a total of 463 tonnes of Gold (82% more than the purchase in 2020)

Why Are Central Banks Buying So Much Gold?

As financial institutions, central banks serve a few primary functions. These include setting interest rates and regulating monetary policy. These banks also control the printing and circulation of bills and coins in an economy. 

Furthermore, central banks are responsible for maintaining the price stability of their national currencies by controlling inflation. The purpose of this is to prevent the collapse of the banking system. 

However, it is sometimes very difficult for central banks to control the fate of their currencies. That’s where buying Gold comes in. 

According to the Dutch Central Bank, “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.”

Below are the three primary reasons why Gold is the commodity choice for national banks:

     1. Hedge Against Inflation

There has been a broad-based and sharper-than-expected slowdown in economic activity around the world, with inflation higher than in several decades. 

Russian invasion of Ukraine, tightening financial conditions, and the COVID-19 pandemic are all hampering the global economic outlook.

To reduce the impact of these developments, every nation needs investments that aren’t tied to the dollar. This is hugely influencing the decision of most countries to buy Gold.  

     2. Risk Mitigation

Gold is a known haven investment. This means it’s prone to acting positively in uncertain periods. It also performs well when the market is volatile and is seen as an asset with no liability.

In the words of American banker and financier JP Morgan, “Gold is money. Everything else is credit”. This statement points to another top-notch quality of Gold, i.e., its sustained purchasing power. 

Central banks purchase Gold to hedge against the weakening dollar and other fiat currencies. Its role as a portfolio diversifier adds to its ability to mitigate risk. 

Central banks also traditionally hold large Gold reserves to safeguard their financial systems. If the system collapses, the Gold supply creates a path to recovery.

In this way, Gold provides financial confidence for the central banks and the nation’s financial security. Since the start of the Russian war, the world is seeing an uncertain time with the risk of nuclear war high. 

Therefore, central banks are resorting to buying Gold more than other purchases. 

     3. Facilitation of Stability and Growth

The primary function of central banks is to promote stability and foster economic growth. As currencies keep dropping in value, banks must ensure their economies don’t suffer. So, Gold is used to control the size and speed of market growth. 

Since most countries are looking to bring stability to their respective countries, It is also helping us understand the current rise in the purchase of Gold by many central banks around the world. 

Which Central Banks Hold the Most Gold?

The U.S. Federal Reserve tops the list of central bank Gold buyers. It holds approximately 8,133 Metric Tonnes (M.T.) of the precious metal. This figure is almost double the number held by second-place Germany at 3,358.

Italy (2,452 MT), France (2,436 MT), and Russia (2,301 MT) hold the third, fourth, and fifth spots in the ranking. China and Switzerland hold the sixth and seventh positions with 1,948 MT and 1040 MT. 

Further down the list are countries with less than 1,000 tonnes. These include Japan (845 MT), India (760 MT), and the Netherlands (612 MT).

How Does Central Bank Gold Buying Affect Global Gold Demand?

Central banks bought a record 399 tonnes of Gold in Q3 2022. This was worth approximately $20 billion and lifted global demand prices. The Gold demand from jewelers and buyers of Gold bars and coins also increased. 

But, there was a fall in the number of investors in ETFs storing bullion. This happened because investors trimmed their holdings as they looked elsewhere to manage Gold’s opportunity cost. 

In the third quarter of this year, global Gold ETFs experienced redemptions which totaled 227 tonnes. This totaled $12 billion and brought the total Gold ETF holdings to 3,548 tonnes ($191 billion) at the end of September.

This adds up to the fifth straight month of outflows in Gold-backed ETFs. It has almost completely reversed the 316 tonnes of inflows from January to April. The current inflows into Gold ETFs are now 7 tonnes since the year began. 

What To Expect From Gold Prices In The Coming Months

The Gold price outlook for the coming months will depend on the Federal Reserve’s willingness to keep raising interest rates. It also has to keep tightening the monetary policy to stimulate growth.

Gold prices may also test their year-to-date laws close to $1,614/oz. This will depend on whether the Fed allows another 75 bps raise in December and fights against passive repricing for 2023.

Final Thoughts

Central banks might be buying Gold aggressively and that gives you all the more reason to do the same. The current Gold buying trends suggest something big can happen. 

Therefore, getting into the Gold trade can truly be a game-changer for you. But you don’t have to trade Gold the old-school way. With the ISA Bullion app, you can start trading from anywhere in the world, on the go. 

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