That’s more than 32,000 ounces, which, with gold currently trading around $2,160 an ounce, translates to nearly $70 million worth of gold. And there’s no reason to believe that the pace of central bank gold buying is likely to decline in 2024. If anything, it’s more likely to increase.

The continued surge in large gold purchases by central banks is a key demand factor that is likely to help push gold prices higher this year.

This article takes a look at which nations are some of the biggest gold buyers and the main reasons why central banks are stocking up on gold.

The biggest buyers of gold continue to be China and Russia. India, another BRICS country, is another sizable purchaser. But central bank gold buying isn’t just confined to BRICS members. The fact is that central banks worldwide have been substantial net buyers of gold since 2010, with a sharp uptick in purchases in 2022 and 2023. This is a noteworthy statistic because of the fact that, since the US killing the Bretton Woods agreement in 1971 by abandoning the gold standard, central banks were, overall, strongly consistent sellers of gold up through the early 2000s.

The shift to central banks becoming big buyers of gold began following the 2008 financial crisis. That was, notably, when central banks engaged in the first big “printing money out of thin air” spree – the first round of large-scale QE (quantitative easing).

Which Nations’ Central Banks are Buying the Most Gold

Central banks worldwide are, overall, strong gold buyers – but the central banks of some countries have been more strongly dedicated buyers than others.

As noted, China and Russia continue to be the countries whose central bank policies are most clearly focused on significantly increasing their gold reserves. It’s estimated that, together, they account for nearly half of the total amount of gold purchased by all central banks over the past 20 years. In October of 2023, China alone accounted for 23 of the 42 tonnes of gold bought by central banks.

The increasingly large purchases reported by China and Russia become even more significant when you factor in that neither of these countries – as well as some other BRICS countries and other sizeable gold buyers – are required to report their actual level of purchases and gold reserves. It’s generally agreed that they’re more likely using that reporting loophole to underreport, rather than overreport, their gold purchases and holdings.

Turkey became one of the more notable big gold buyers in 2022, with reported purchases of more than 30 tonnes. By the following year, gold made up more than one-third of Turkey’s central bank’s total reserves. India, while buying gold at only about half the rate of China’s central bank, remains consistently one of the largest gold buyers over the past decade.

In Europe, recently increasing gold purchases by the central banks of Poland and Germany have been noted. Poland added a reported 100 tonnes to its gold reserves in 2023. Hungary has increased its gold holdings by nearly 30 times – going from a mere 3 tonnes in 2018 to almost 100 tonnes by 2023. The central bank of Czechoslovakia increased its gold reserves by more than 35% in 2023 – and the bank’s Governor stated his intention to up its gold reserves substantially higher: by as much as 1,000%.

A list of the world’s top ten central bank gold buyers reveals a couple of interesting characteristics. The list includes Russia, China, Iraq, Qatar, Egypt, the UAE, India, Turkey, and Ecuador. First, it’s impossible to miss the presence of several major Middle Eastern powers. Second, and perhaps more importantly, the list doesn’t exactly appear to be overpopulated with countries considered excessively friendly toward the United States and its closest allies. That fact supports the narrative that some significant part of the move toward gold is driven by a move away from the US dollar.

The Reasons Why Central Banks are Buying More Gold

There are three principal reasons commonly cited for the current push by central banks to acquire larger stores of gold.

• Inflation and general economic uncertainty
• Rising interest rates
• De-dollarization

1 – Overall economic uncertainty, inflation, and fears of recession

The world’s major economies – certainly those in the West – are increasingly plagued with inflation. Listening to the Federal Reserve and the Biden Administration crow about their economic “successes”, you’d think that prices were actually coming down. But the fact is that prices of all the things that people have to pay for every month continue going up. The average price of a gallon of milk in the US - $3.93 in 2023 – was almost double the average 2020 price of $2.06.

All that the Fed has managed is to slow down the rate at which inflation is increasing prices. It hasn’t stopped inflation, and certainly hasn’t reversed it.

“Economic uncertainty” is the watchword of the day. Economic and market analysts continue to issue warnings about the possibility of a major global recession. Some analysts express confidence that the Federal Reserve can manage a “soft landing” in the US, but that may well be nothing more than wishful thinking.

Throughout history, gold and silver have proven themselves to be reliable stores of value as hedges against inflation. Therefore, in order to keep up with rising prices and the diminishing purchasing power of fiat currencies, it shouldn’t be a surprise that central banks are stocking up on gold.

2 – Rising interest rates

In order to keep the economy from falling off a cliff, the Federal Reserve and other central banks managed to keep interest rates artificially low for several years. But sooner or later, economic reality catches up – even with the Federal Reserve. Sharply rising inflation finally forced the Fed to raise interest rates and shift from QE – quantitative easing – to QT – quantitative tightening.

Although the first interest rate increases did, initially, have a depressive effect on gold prices, the yellow metal recovered fairly quickly. Now, despite higher rates – which are typically a negative for precious metals prices – gold has surged to new all-time highs. The implication appears to be that any depressive effects higher interest rates may have on gold and silver prices can no longer overcome all the fundamental economic forces that are driving gold prices relentlessly higher.

Bad Bonds

Rising interest rates are bad overall. They’re bad for homebuyers, bad for credit card users, and bad for companies wanting to borrow money. But one lesser-known negative impact of higher interest rates – one that’s particularly relevant for central banks – is the fact that rising interest rates lead to losses for bond holders.

Bonds became an exceptionally large part of central bank reserves as a result of the huge bond purchases accompanying QE. Now, big losses in bond holdings are putting central banks in a rather precarious financial position. One possible solution central bank heads are eyeing is the option to utilize revaluation of their gold holdings as a way to shore up the massive bond losses on their balance sheets. The more gold they have to revalue, the better such an option would work. A number of European central banks, including Germany’s, have recently floated the idea.

(Central bank revaluation of their gold holdings is a rather complex topic that I will try to explain clearly in a future article. For now, here’s the short version: The Federal Reserve, for example, values its gold reserves at its historical cost of approximately $42 an ounce. Therefore, it could make its balance sheet look a lot better by revaluing those reserves at gold’s current market price above $2,000 an ounce. So, what’s holding them back? – The fact that central banks, longtime champions of fiat currency, are very reluctant to make any move that would give further legitimacy to gold as “real money” and as the ultimate reserve financial asset.)

3 – De-dollarization

As already noted, the list of voracious gold buyers among the world’s central banks is populated largely by nations that are increasingly less friendly toward the US. The BRICS countries, led by China and Russia, are making an obvious push toward de-dollarization. The US dollar’s status as the world’s foremost reserve currency remains intact, but isn’t nearly as overwhelming in economic power as it used to be.

Following the US freezing hundreds of billions in Russia’s paper currency assets, Russia has completely divested itself of US Treasury securities holdings. China has cut its holdings of US Treasuries nearly in half.

Strong evidence that moving more out of the dollar as a reserve involves moving more into gold is clearly illustrated by the chart below. The chart shows a stark inverse relationship, starting around 2020, between China’s growing gold reserves (white line) and its shrinking holdings of US Treasuries (light blue line).

Central Bank Gold Buying – Summary

The current surge in central bank gold buying is unprecedented over the past half century. It reflects a major policy shift by central banks, which have historically been gold sellers, not gold buyers. Many countries are making a concerted effort to massively increase the percentage of their central bank reserves that are made up of gold.

Business Insider recently quoted a market analyst at UBS as saying, “We think this trend of central bank buying is likely to continue amid heightened geopolitical risks and elevated inflation.”

Large institutional investors have also been pouring huge sums of cash into investing in gold. For example, Warren Buffett – not historically a big gold bull – has scooped up more than half a billion dollars’ worth of the precious metal. And Bloomberg reports, "Investors are expected to continue accumulating gold at an accelerated pace this year."

Large-scale central bank gold buying, combined with renewed retail investor interest as gold pushes to new all-time highs, is likely to create a demand picture that can only drive the value of gold and silver higher.

• J.B. Maverick

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Sources:

https://www.mining.com/web/gold-revaluation-the-hidden-motive-behind-central-banks-gold-buying/

https://www.cnbc.com/2023/12/08/geopolitics-central-banks-could-keep-gold-demand-hot-in-2024-world-gold-council.html

https://www.ssga.com/us/en/intermediary/etfs/insights/whats-driving-central-banks-to-record-gold-purchases-and-will

https://www.gold.org/goldhub/gold-focus/2023/12/central-banks-summer-buying-continues-october

https://www.omfif.org/2023/12/central-banks-and-the-revival-of-gold/

https://www.sott.net/article/475975-Central-banks-buy-gold-at-fastest-pace-in-55-years-as-nations-prepare-to-ditch-the-dollar

https://ibisingold.com/article/detail/the-czech-national-bank-buys-gold-its-gold-reserves-have-been-increased-/en

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