Central Bank Demand for Gold Set to Strengthen

The comments below are an edited and abridged synopsis of an article by Stefan Gleason

There’s an explosion in retail demand for gold, but retail investors aren’t the only ones buying the yellow metal. Central banks around the world are stockpiling gold in a big way.

An image of a steel bear trap with open jaws lying on a flat concrete surface with fifteen one kilo bars of gold stacked in the centre, denoting risk vs reward. Shot with selective focus.

A recent central bank survey says that gold remains a favourable reserve asset globally.

Central banks buy and hold gold for many of the same reasons that retail investors do. They want to diversify their reserves and hold liquid assets that retain purchasing power over time.

Amid geopolitical strife and an explosion of the US money supply in response to Covid, countries are unsure about the US dollar’s longer-term standing as global reserve currency in international commerce.

Eighty percent of central banks hold gold in their reserves. Twenty-five percent of respondents plan to increase their gold reserves, up from 21% last year.

Bullion provides security of principal (it cannot default), protection against counterparty risk, and real upside potential compared to debt instruments denominated in depreciating fiat currencies, which carry a negative yield in real terms.

Central banks are even more optimistic about gold as a reserve asset, with 61% of respondents saying they expect global gold reserves to increase over the next 12 months.

Negative real interest rates were rated as relevant by the highest number of respondents.

Historical position, performance during times of crisis, and long-term store of value/inflation hedge rank as the most important reasons why central banks hold gold; protection against default risk is another.

Given that many countries and US states divert their surplus cash balances into paper investments, gold serves as an excellent non-correlated asset without the counterparty risk that exists in virtually all other financial holdings.

Central bank demand may be a major factor for gold hitting new highs in the months ahead. As doubts over currencies increase and as the world becomes increasingly polarized, nations will seek to hedge their risks with the tried-and-true asset capable of doing so: Gold.

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