20th June 2024  - Gary Mead

Central bankers want gold

Central bankers want gold

Gold is shaping up to be the favorite asset of central bankers - which makes me think, 'what do they know that I don't?' Central bankers are not gifted with special insights into monetary affairs; but even the dimmest central banker may have noticed that the Dollar price of gold has gone up by more than 40% since the Israel-Hamas conflict started last October.

The World Gold Council (WGC), which exists to promote gold and whose membership includes most of the world's leading gold miners, has just published an annual survey on the intentions of central banks. The crucial finding of the survey, which was conducted between February and the end of April this year, is that almost a third of the 70 central banks who responded intend "to increase their gold reserves in the next twelve months, the highest level we have observed since we began this survey in 2018." Of emerging market respondents, almost 40% plan to increase their gold holdings.

Now, given the WGC's essential purpose is to increase demand for gold, skeptics might raise their eyebrows at this survey's conclusion. The WGC would say that, wouldn't they? Not so fast; the WGC doesn't shy away from bad news, i.e. when central banks sell more gold than they buy, as the chart from the WGC below shows, that too gets published.

Why hold gold?

Digging into why central banks choose to hold gold, the survey found that "no default risk" was the biggest reason. Risk in general has mushroomed in the last couple of years, thanks to the war in Ukraine, the explicit identification of the West as an enemy by Russia's President Putin, and the explosion in the Middle East. It's no surprise therefore that in 2022 and 2023 the world's central banks collectively bought more than 1,000 tonnes of gold each year.

The world of 2024 is an uncertain place, almost unrecognizable from that of 1999, when the UK's Chancellor, Gordon Brown (a Labour politician) started the sale of 400 tonnes of Britain's official gold reserves, netting some $3.5 billion. Since then the Dollar price of gold has risen by some 840%. Brown is thought to have invested the money from the gold sales into US Treasury bonds, the return on which has been far below that of gold. Brown is now castigated for his actions but like anyone might in the gold world, he got his timing wrong. That's a childish blunder; gold isn't for a quick profit.

Timing is critical for any decision about investments. There is a strong clue about the likely price trajectory, given that we trust the survey. To the question 'how do you expect central bank gold holdings to change over the next 12 months?', 81% of those surveyed say they expect gold holdings to increase. That's 10% more than in 2023, when the Dollar price of gold rose by about 15% over the course of that year.

Of course the price of gold does not depend solely on the buying/selling on central banks; but they are the 'whales' of the gold world and their moves can give a significant shove to gold. Geopolitical fears inspire them as they do all of us. The slew of sanctions imposed on Russia after it invaded Ukraine showed the risk countries can face if they fall foul of international opinion - the European Union's decision to confiscate the $3-$5 billion in interest generated by the sequestered $300 billion of Russian assets demonstrates the risk in holding Dollars as a reserve asset. That Dollar in your pocket isn't really yours. And what you can buy with it can and does change. On the other hand if you hold gold - not a share in a gold-backed Exchange Traded Fund (ETF) - your will find that your assets are less likely to be confiscated.

But this is not a zero-sum game; if central banks are going to increase gold in their coffers, the Dollar is likely to continue losing out. In 2000 the Dollar accounted for more than 70% of global foreign exchange reserves; today it's about 55% according to the International Monetary Fund (IMF). America's gleeful imposition of sanctions on all and sundry has effectively weaponized the Dollar and given a leg-up to gold. Whatever you feel about the use of sanctions against regimes that Washington D.C. dislikes, one unintended consequence is that gold benefits - and will continue doing so.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.