Central banks and the role of gold

Central Banks are important players in the overall gold market.
 
This is no surprise given gold is a valuable asset for central banks, due to a range of factors including its lack of credit risk and high liquidity, as well as its diversification qualities.
 
Central banks engage in a range of activities in the gold market including swapping and leasing the precious metal, with the precious metal also playing an important role as a central bank reserve asset.  
 
This was made abundantly clear last week, when the World Gold Council their latest Gold Demand Trends report. Their research suggests that in Q3 alone, central banks added almost 400 tonnes of gold to their reserves (see chart below), with this year so far on track to be the biggest year for gold buying on record from these key market players.

This article looks at demand for gold at a central bank level, focusing on how much they own, recent demand trends and who is doing the buying, noting that it doesn’t include the data from Q3, referenced in the chart above.
 
We also touch on why central bank gold demand is set to remain well supported going forward, and key takeaways for investors.

How much gold do central banks own?

The latest statistics (data as at Q2 2022) suggest central banks hold just over 35,000 tonnes of gold. With an end June 2022 gold price of USD $1,817 per troy ounce, these central bank gold holdings are worth just over USD $2 trillion.
 
These gold holdings are an important part of total central bank reserves, with many of the more developed market economies (the United States, European nations etc) holding more than 50% of their foreign exchange reserves in gold.

Demand trends over the years

Central banks and national treasuries have been major owners of gold for more than 100 years. By 1965, estimates suggest total gold reserves held by these institutions topped 38,000 tonnes, the highest recorded level for any given year.
 
Over next five decades, central bank gold holdings declined on aggregate, with holdings falling for the better part of twenty years straight from the middle of the 1980s right up until the Global Financial Crisis hit.
 
Since then, central banks have been net buyers of gold, adding to holdings in every year since 2009. Total purchases over this time period (not including purchases in 2022 so far), have come to 5,500 tonnes, at an average of just over 423 tonnes each year.
 
These trends in total central bank gold holdings can be seen in the chart below.

Chart: Total central bank gold reserves (tonnes) 2000 to 2021

Source: World Gold Council

Who is doing the buying?

Central bank gold purchases since the Global Financial Crisis have been dominated by emerging market and BRIC (Brazil, Russia, India, China) nations. By contrast, the gold holdings of central banks in the more advanced economies of Europe and the United States have remained statics, though crucially, they are no longer declining.
 
The change in gold holdings among select emerging market and BRIC nations can be seen in the table below, which highlights total gold tonnes held both at the end of 2008 and the end of 2021.

Table: Total gold tonnes held

Source: World Gold Council

At 4,799 tonnes of gold added, these nations alone account for almost 90% of the increase in total gold holdings amongst all central banks.

Keep stacking BRICS!

While some of the BRIC nations, most notably China and Russia are now major gold holders, it is likely they will continue to add to their reserves for the foreseeable future, adding to net gold demand.
 
There are two reasons for this, which are interrelated.
 
The first relates to the geopolitical environment we find ourselves in. From the war in Ukraine, to tensions over Taiwan, there is no doubt that nation state political tensions are at much higher than levels these days.
 
Yields on government debt securities, adjusted for inflation, also remain at or near record lows, while the threat of sanctions on the use of these assets is also now a factor.
 
Given this backdrop, it is likely BRIC nations will prefer to add gold to their reserves, rather than debt securities issued by Western governments.
 
Reinforcing this is the fact that at present, gold holdings by BRIC nations compared to more advanced economies remain low, both in absolute terms and as a percentage of foreign exchange reserves.
 
This can be seen in the table below, which shows total tonnes of gold held, and what share of reserves this gold represents, for the four largest gold holding nations in the world (the USA and three European nations), vs the BRICS.

Gold holdings – July 2022

Source: World Gold Council

If BRIC nations wanted to bring their gold holdings up to a comparable level, then on average they’d need to add the better part of 3,000 tonnes of gold to their existing stockpiles.

Key insight for investors

While changes in central bank gold holdings don’t have a strong impact on short-term price movements, they are now an important source of gold demand.
 
This coupled with the fact that central banks on aggregate continue to hold more than USD $2 trillion worth of the precious metal demonstrates its ongoing, and indeed growing importance at a nation state level.
 
Even our money masters understand the unique safety that gold offers.

Warm regards,

The ABC Bullion Team

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