Recent data from the World Gold Council (WGC) indicates that central banks increased their purchases of gold in May. It represents the second month in a row of strongly bullish sentiment for the yellow metal, adding to the longer-term pattern of central banks’ growing hunger for gold.
In April, central banks added 19.4 tons of gold to their reserves. In May, they added another 35 tons. Turkey (13.3t), Uzbekistan (9t), Kazakhstan (6.3t), and India (3.8t) were mostly to blame for the main increases in both March and April. According to the World Gold Council, Qatar replenished all of the gold it had sold this year by adding 4.7 t of gold to its holdings in May. The WGC also noticed that Germany was the only large country that sold more gold than it bought in the month. This meant that Germany’s gold stockpiles went down by 2 tons.
All of this suggests that many countries worldwide, especially emerging economies, will buy a lot of gold in 2022. Krishan Gopaul, the senior analyst for EMEA (Europe, the Middle East, and Africa) at WGC, says that most of the buying has come from Turkey (56t), Egypt (44t), and Iraq (34t), with smaller amounts coming from a few other banks.
Turkey has purchased 56 tons, Egypt has purchased 44 tons, and Iraq has purchased 34 tons. “And even though we have seen a greater number of banks lower their gold reserves so far in 2022, the overall amount of sales is below that of acquisitions,” he said. “And while we have seen a higher number of banks drop their gold holdings so far in 2022.” As a result, current gold-buying activity extends a pattern of central banks adding to their gold holdings that have been going on for several years. It was the 12th year in a row that they were a net buyer, and they bought a total of 463t last year. It is an increase of 82% compared to the amount they acquired in 2020. The World Gold Council (WGC) reported earlier this year that central banks hold more than 35,000 tons of gold. This amount is about one-fifth of all the mined gold, which shows how much central banks want the yellow metal.
Why does this happen to be the case? Gold’s diversification benefits to central banks—and investors in general—are a significant part of its allure. It is especially relevant when considering how susceptible individual currencies may be to prolonged periods of extreme volatility. In contrast to currency reserves, however, the endurance of gold and its scarcity and limited supply are only some of the characteristics that provide central banks the assurance and trust they need during market volatility and uncertainty. As a result, it gives them access to vitally stable assets they may keep in their reserves. Because gold often has an inverse connection with the US dollar, another global reserve asset, central banks can stock up on gold to safeguard the value of their reserves when the value of the US currency declines.
In addition to this, developing markets have been the ones to significantly increase their gold purchases recently, while mature economies have been the ones to mostly ignore this trend. In a February article for Reuters, the World Gold Council (WGC) said that the US and Germany have the most gold, with more than 8,100 tons (78% of all foreign reserves) and 3,300 tons, respectively. The WGC also pointed out that the most active central banks are no longer the traditional economic powerhouses like the US, Germany, France, and Italy. Instead, they are keeping the large amounts of gold they already own.
According to the World Gold Council, growing economies such as Russia, China, Turkey, and India have “stepped into their place as purchasers of gold.” “However, despite the fact that these four countries have purchased significant quantities of gold over the past decade or so, they still lag behind their Western counterparts. Gold accounts for only 22.0% of Russia’s reserves, while China’s reported holdings of just under 2,000 tons account for a mere 3 percent,
And it would appear that central banks have added further bullion purchases to their shopping lists for the near future. For example, the Central Bank of Iraq said it had made its first large purchase of gold since September. It added 34 tons in June, bringing its total gold holdings to 130.39 tons and propelling it to the 30th spot on the global list and the 4th spot in the Arab world. The Central Bank of Iraq said that “it is notable that gold is the most important asset that central banks and international financial institutions hold” and that “gold is a haven in times of uncertainty because it is accepted around the world.”
Poland and the Czech Republic, located in eastern Europe, have expressed their intent to increase their gold reserves. In October 2021, Poland planned to purchase 100 metric tons of gold the following year. Adam Glapinski, the head of the Bank of Poland, says that gold will still be worth something even if someone shuts off the global financial system’s power, destroying assets based on electronic accounting records. Gold will retain its value no matter what. We will not presume that something like this will occur. However, an old proverb states, “forewarned is always insured.” In addition, the central bank must be well-prepared for any scenario, regardless of how bad it may be. Because of this, we believe that gold should have a prominent role in managing our foreign exchange.
And Ale Michl, who became the new governor of the Czech National Bank (CNB) in July, said a month before he took office, the bank would increase its gold reserves by almost ten times, from 11 tons to 100 tons. Ale Michl assumed office in July. “You’re right. The volatility of yields would increase then; that’s the danger.” On the other hand, the anticipated rate of return over a longer period would be higher. As part of a research effort, my fellow CNB employees Michal Koda, Tom Adam, and I are attempting to assess the severity of this danger. According to a post on a gold news website called Kitco, Michl stated, “My objective is to establish a long-term prosperous CNB.”
However, not every nation is taking part in the current gold-buying frenzy that is going on. Since the war with Russia on February 24, the Deputy Governor of Ukraine’s Central Bank stated on July 17 that the country had sold $12.4 billion worth of gold reserves since the conflict began. According to the revelations made by Deputy Governor Kateryna Rozhkova, “We are selling (this gold) so that our importers can purchase products that are vital for the country.” The exceptional and difficult conditions that Ukraine currently finds itself in are, of course, the reason for the country’s inclination to operate as a net gold seller.
Even so, the World Gold Council (WGC) surveyed 57 central banks and released the results on June 8. Twenty-five percent of those surveyed said they planned to add to their gold reserves in the next 12 months. The number was more than 21 percent in the same survey a year ago. “The planned purchases are mostly caused by growing worries about a possible global financial disaster,” says the research. Other important things to consider are expected changes in the international monetary system and worries about rising economic risks in countries with reserve currencies.
The World Gold Council also noticed that all central banks that want to buy more gold are from emerging markets or economies that are still growing. It accounts for 25 percent of central banks worldwide (EMDEs). Eighty percent of the central banks that participated in the study expected an increase in the size of their gold holdings over the following calendar year. EMDE central banks’ obstacles in their efforts to preserve orderly capital flows and currency stability are larger. The findings suggest that these banks tend to see gold as a more significant component of their overall reserve management strategy, particularly when there is a higher requirement for assets that might mitigate risk.
The fact that there is a growing unanimity among EMDE central banks is arguably the most fascinating aspect of the study. These central banks are concerned about shifts in global economic power, prompting them to be less enthusiastic about the function of the US dollar as a global reserve currency. According to the study results, a significant number of central banks (42%) anticipate that the US dollar value will fall relative to total reserves over the next five years. The central banks of EMDEs appear to be especially apprehensive about the role of the greenback; 45 percent anticipate a reduction in the proportion of their reserves that are held in US dollars, which is a higher percentage than the 31 percent held by the central banks of advanced countries.
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