Central Banks Persisted in Record-Breaking Gold Purchases Last Year. But Why?

According to a recent report by the World Gold Council (WGC), central banks, known for their significant influence on the gold market in recent years, purchased exceptionally large quantities of gold last year.

In the final quarter of the previous year, global central banks acquired a total of 229 tons of gold. Throughout the entire year, they purchased 1,037 tons, accounting for approximately a quarter of worldwide gold demand. Currently, central banks globally officially possess 36,700 tonnes of gold. Throughout history, about 215,000 tons of gold have been extracted globally.

In 2022, central banks made their largest acquisition of gold since 1950, buying a total of 1,082 tons. They have consistently been net purchasers of gold since 2010, adding 7,800 tons to their reserves over 14 years. Remarkably, more than a quarter of these acquisitions occurred in the last two years alone.

Findings from the World Gold Council’s surveys in 2022 and 2023 indicate that central banks value gold primarily for its crisis protection qualities and its enduring value as a long-term asset. These factors are the key reasons why central banks continue to hold and increase their gold holdings.

Gold is Bought by Developing Countries

The majority of gold purchases have been made by central banks from developing countries, many of which have emerged as consistent buyers in recent years, the report reveals.

Leading the gold acquisition, China’s central bank significantly bolstered its reserves by 225 tons last year, marking the largest increase since record-keeping began in 1977. According to the report, China’s official gold reserves now stand at 2,235 tons, though they constitute only 4 percent of the nation’s central bank reserves.

There is speculation that China’s actual gold reserves far exceed the official figures. Given China’s prohibition on gold exports and its production of thousands of tons of gold over the past two decades, estimates suggest the real reserves could be between 10,000 and 15,000 tons.

Following China, the Polish Central Bank ranked second in gold purchases, acquiring 130 tons of gold from April to November, which elevated its reserves by 57 percent within a year to 359 tons. Adam Glapinski, the head of Poland’s central bank, has expressed an ambition to maintain 20 percent of the bank’s reserves in gold, which currently stands at 12 percent.

Singapore claimed the third spot by augmenting its gold reserves by 77 tons to a total of 230 tons last year. Additionally, the Central Bank of Libya and the Czech National Bank made significant purchases, buying 30 tons and 19 tons of gold respectively, bringing the Czech gold reserves to 31 tons.

The European Central Bank’s reserves also saw an increment of about 2 tons, attributed to Croatia joining the eurozone.

The Biggest Sellers

Purchases substantially outpaced sales, with Kazakhstan and Uzbekistan emerging as the largest sellers, relinquishing 47 and 25 tons of gold, respectively. These central banks typically engage in domestic gold buying, as both countries are notable gold producers. This dynamic leads to an active management of their central bank reserves, making it common for these nations to fluctuate between being buyers and sellers.

Bolivia’s central bank reserves decreased by 18 tonnes between May and August, following the enactment of legislation permitting the sale of reserves.

Turkey, too, was a net seller, despite its significant acquisitions in 2022. The country sold 159 tons of gold from March to May to meet high domestic demand. However, in the latter half of the year, it essentially reacquired almost all of the gold it had sold. Currently, Turkey’s gold reserves have increased to 540 tons.

The World Gold Council notes in its report that forecasting future purchasing volumes by central banks is challenging, yet there’s no indication that the trend of acquiring gold will cease. While central banks may not surpass last year’s purchase volumes this year, substantial acquisitions are expected to continue.

Tavex Analysts Comment

First and foremost, it’s crucial to acknowledge that a significant portion of central bank gold purchases remains undisclosed, with about half of such transactions unreported. While we have knowledge of 533 tons of gold acquisitions, the buyers of the remaining 504 tons are unknown. It is speculated that China and Russia may be increasing their reserves at a pace much quicker than what has been officially reported.

Secondly, central bank purchases have played a critical role in bolstering gold prices in recent years. Notably, in the third quarter of 2022, coinciding with a surge in central bank buying activity, gold prices reached a turning point, stabilising at approximately $1,615. Following this period, gold’s value has seen an approximate 25 percent increase over eighteen months.

The primary restraint on gold prices in recent times has been the high-interest rates, which rendered bonds more appealing due to their higher yields. However, with interest rates anticipated to decline, the major factor suppressing gold prices in the short term is diminishing. Should central banks maintain their substantial purchases into this year, it is plausible to anticipate consecutive new records in gold prices.