National Central Banks Continue Their Gold Rally

Central banks, including the US Federal Reserve and European Central Banks, continued their record gold purchases this autumn, having a significant impact on the gold market and the broader financial system. According to the World Gold Council, they’ve already increased their reserves by 800 metric tonnes this year, indicating a significant investment in this precious metal.

Central Banks’ Strategy: Diversifying Reserves Amid Economic Changes

In total, around the world, central banks bought 337 metric tonnes of gold in the third quarter of 2023, bringing the year’s total to 800 metric tonnes. This figure is 14% higher than in the same three quarters last year. This indicates a long-term strategic shift away from fiat currency reliance and towards the gold standard. The central banks’ purchases last year were the largest since 1967, highlighting the growing demand for gold in financial markets. This is especially relevant during times of financial crisis.

The average price of gold per tonne in 2023 has been a staggering $62 million, indicating that central banks, including the Bank of England and the National Bank of Poland, have collectively invested nearly $50 billion in gold this year. Their actions reflect a deep analysis of supply and demand dynamics in the precious metals market.

Leading Buyers in the Gold Market: China and Poland Set the Pace

The People’s Bank of China led the buying spree, increasing its gold holdings by 78 metric tonnes in the third quarter and signalling robust economic growth aspirations. Since the beginning of the year, China has added 181 metric tonnes, bringing its total to 2,192 metric tonnes. Analysts speculate that China’s actual gold reserves, measured in troy ounces, could be much higher, potentially reaching 15–20,000 metric tonnes.

The National Bank of Poland has also been active in gold investing, increasing its reserves by 105 metric tonnes this year, demonstrating the strategic importance of gold bars in national reserves. The President of the Central Bank of Poland, Adam Glapinski, has stated his intention to increase the gold share of reserves to 20%. Their current holdings are 334 metric tonnes, which accounts for 11% of total reserves.

Central banks bought 337 metric tonnes of gold in the third quarter

Turkey, re-entering the gold market, bought 39 metric tonnes in the third quarter, contrasting with its net seller status in the previous quarter. This change exemplifies how domestic demand and broader economic trends affect the intricate dynamics of buy-and-sell activities in the gold market.

Diverse Global Players: Broadening Gold Investment Across Nations

India, Uzbekistan, the Czech Republic, Singapore, Qatar, Russia, the Philippines, and Kyrgyzstan were also significant buyers, each purchasing more than a tonne of gold. These purchases highlight the critical role of gold in the global financial system as well as the growing interest in diversifying reserves, particularly in the context of gold investing.

Kazakhstan emerged as a rare seller, parting with 4 tonnes of gold, demonstrating central banks’ nuanced strategies in managing their precious metal holdings.

The data for the first three quarters of the year clearly indicate a continued trend of robust central bank gold buying, with the World Gold Council noting that the demand for gold has exceeded their expectations.

Tavex’s comment:

Central banks hold most of their reserves in government bonds. Gold usually accounts for only 1 percent of reserves.

As government bond prices have started to fall rapidly since the 2020 peaks, this fall in prices is also eating into national reserves. The 40-year cycle of rising bond prices ended in 2020, and we will now see a long-term decline in prices as debt is at record levels and inflation will be much higher in the 2020s than in the last decade.

Many countries are realising that in such an environment, they need to diversify their reserves and better protect themselves against risks. Also, the buildup of gold reserves is mainly concentrated in the East, with the West not buying as much gold. This may be linked to a trend where Asian countries want to reduce their dependence on the dollar and other currencies.

Central bank gold purchases are improving the fundamental picture of gold and providing support for the price. This is one of the reasons why gold has remained relatively high over the past year.

Bank of England’s Strategic Reserve Management: Navigating Global Trends and Economic Uncertainties

The Bank of England’s response to the global trend of central banks increasing their gold reserves, particularly in the aftermath of the 2008 financial crisis, highlights a strategic shift in reserve management in the United Kingdom. Initially, the Bank of England, like many other central banks, increased its holdings of government bonds as part of quantitative easing to help stabilise the economy.

However, as bond yields fell and public debt rose, the effectiveness of these bonds as reserve assets dwindled, necessitating a rethinking of reserve strategies. While the United Kingdom has not significantly increased its gold reserves in comparison to some Eastern countries, it has kept a significant amount of gold on hand, recognising its value as a hedge against currency fluctuations and inflation. This approach is consistent with a broader trend among central banks to diversify reserves in the face of volatile bond markets and economic uncertainty.

The United Kingdom, a major player in the global gold market, takes a more conservative approach to gold reserve management than Asian countries, but increased demand for gold in these regions supports gold prices globally. This situation emphasises the Bank of England’s need for diversification and adaptability in reserve management as it navigates the UK’s financial strategy in an increasingly complex and interconnected global economy.