Gold reserves at highest level in nearly half a century

Central bank gold reserves have risen to their highest level in nearly half a century. Particularly emerging market central banks bought the precious metal big this year, influenced by a strong dollar and international sanctions against Russia.

36,782 tonnes of gold. That’s how much of the precious metal central banks hold combined, according to the latest data from World Gold Council. The British advocacy group for gold producers draws its conclusion from IMF data, supplemented by buying and selling figures from central banks themselves. 

Moreover, in October, central banks added 31 tonnes of gold to global reserves, according to the WGC, with the central banks of the United Arab Emirates, Uzbekistan and Turkey in particular buying the precious metal. Earlier, a record quarter had seen 400 tonnes of gold purchases by central banks. An amount roughly equivalent to what central banks normally buy in an entire year, according to Bloomberg. 

Turkey is convincingly at the front of the gold queue this year. The central bank bought more than 100 tonnes of gold so far, bringing its stockpile to almost 500 tonnes of gold. Egypt and India have also bought heavily this year, with around 44 and 31 tonnes. 

Safe haven

Historically, gold has been seen as a safe haven, especially in volatile times. Gold provides no dividends or returns, is the common argument. Thereby, inflation is skyrocketing this year, while gold is considered to be relatively stable in value. Although the gold price moved between 2043 dollars and 1633 dollars this year, it is now back around the same level as in January, at 1805 dollars per troy ounce (31.1 grams). ABN Amro wrote in its outlook last week that it expects a price around 1,900 dollars by the end of next year. 

Whereas in the short term gold is a counterweight to a troubled market, in the long term it is more of a store of value. Something that also makes a central bank independent of politics, Aerdt Houben of De Nederlandsche Bank once put it in an interview with Het Financieele Dagblad. 

“To be independent, we have to be solvent,” the financial markets director said. “In addition, gold plays a function in times of crisis. That is the time when people look to the central bank, to know whether they can continue to trust our fiduciary money system. In an armageddon situation, we should be able to set up a new monetary unit from scratch.”

Dollar

Yet volatility and crisis function do not now seem to be the main reasons for the purchases, as the purchases have been made mainly by a group of central banks from emerging markets. The Economist points to the dollar for that reason, as emerging markets mostly settle imports and external debt in dollars. “Instead of dollars, they have US government securities in their reserves. Now that that Treasury paper has depreciated due to interest rate hikes by the US Federal Reserve, smaller central banks in particular have swapped some of that government paper for gold.” 

Bloomberg columnist David Fickling recently outlined a commonality between the buyers: countries in trouble with sharply depreciated home currencies. And unlike bonds, Fickling said, “buying gold does not provide for a relationship with an unreliable counterparty”. The evaporation of nearly 500 billion dollars of sovereign debt on the balance sheet of the Russian central bank as part of Western sanctions has made other countries realise that US government debt may not be as risk-free as previously believed. 

Alternative medium of exchange

“Turkey and Egypt are key US allies, but their relations have deteriorated significantly over the past decade as their governments have aligned more closely with emerging authoritarian powers. International relations are more uncertain now than they have been in decades. In that world, it makes sense for central banks’ reserves not to be too tied to ties to any one country.”

The Economist also sees a link to developments around Russia, but highlights the fact that gold has remained largely outside the reach of sanctions. “Gold is a way to circumvent Western sanctions on Russia, much of whose reserves have been frozen since March and whose banks are largely disconnected from the dollar-based international payment system. For countries that traditionally do a lot of business with the Kremlin, such as Turkey, gold offers an alternative medium of exchange.”

This article originally appeared on InvestmentOfficer.nl.