Central Banks Turn to Gold After Multi-Year Absence

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Economic uncertainties, inflation, political instabilities, rise of national debts, and countries’ conflicts of interest have left central banks with the only ultimate safe-haven asset: Gold.

Central banks are among the world’s largest investors in gold, with total holdings of more than 30,000 tonnes. Today, central banks’ gold reserves are rising even higher, as they foster safety and liquidity for investors during these times of global political and economic uncertainties. As buying patterns are changing, the momentum is growing. Gold net purchases are increasing year-over-year, and the number of central banks entering the gold market is increasing as well. Some inactive central banks, such as Poland, Hungary, and India, are making a big comeback to the gold market after multi-year absences. The net purchases totaled 351.5 tonnes in the first 10 months of 2018. This is up 17% year-over-year, which is the strongest showing since 2015.

The world is at risk today and the reasons behind the critical economical position are various.

Mario Draghi, the Director of European Central Bank, is noticing that negative interest rates have been impacting the European economy and have led to a major liquidity crisis within the European banking system. The failure to pay off the national debts, the dictatorial approach of certain European countries such as Brussels, the increase in government conflicts, and the chaos of BREXIT have left the euro vulnerable, so it has never been able to compete on the world stage of currencies in a serious manner. The instability of the euro has also been behind the strength of the dollar. In these times of uncertainties and instability, gold has again proved its role as the safe haven to retain value and wealth.

Central banks outside of Europe have also been caught in the uncertainty of the dollar. They have been selling dollars and buying gold in an effort to stem the advance of the dollar. China is one of the central banks that is adding to its gold reserves in a desperate attempt to keep the yuan from crashing against the dollar and reducing the trade surplus. But although they are selling the dollar, they do not want to buy euros or Japanese yen.

China is now strategically moving to develop their own consumer economy by switching their reserves from US dollars to gold after realizing that their reserve currency was not powerful. China is becoming the world’s biggest consumer and producer of gold. China is not only returning to a gold standard strategy to preserve its wealth and store its value, but it is also to support its mining industry as the US did during the 19th century with silver.

In conclusion, central banks today are not only looking to gold as a short-term risk diversifier, but also as a long-term stable asset that has “a confidence-building feature,” according to the central bank’s statement accompanying its October 2018 gold purchase. Also, it is important to mention that the key drivers are undoubtedly safety, stability, and protection. Gold has historically been proven to remain free from political risk and economic uncertainties, separate from alternative assets and financial markets, and a hedge against inflation and the fluctuations of fiat currencies. 

Sources:

Back to World Gold Council: https://www.gold.org/goldhub/research/gold-investor/gold-investor-february-2019/central-banks-turn-to-gold

Financial Times: https://www.ft.com/content/1cb92e5a-43e6-11e9-b168-96a37d002cd3 

Bloomberg