Are Central Banks Buying More Gold In Anticipation Of Shift In Global Economic Power?
Central banks upped their gold reserves at the biggest rate in three years in the first half of 2018.
In the first six months of 2018, central banks added a net total of 193.3 tonnes of gold to their reserves - an 8% increase compared to the previous year, and the strongest H1 of buying since 2015.
This was driven by three main buyers - Russia, Turkey and Kazakhstan - who accounted for 86% of central bank gold purchases - Russia buying 383.3 tonnes, Turkey 125.8t, and Kazakhstan 125.8t.
However new countries also got involved, with Indonesia, the Philippines, Thailand, and India buying gold after a period of absence, the latter for the first time since 1978.
This is according to a new report from the World Gold Council on H1 central bank gold buying trends.
The IMF says central banks now hold 10% of global FX reserves ($1.36tn) and accounted for 10% of demand in the first half of the year.
What is driving gold demand?
One of the main reasons why central banks have upped their gold buying in 2018 is diversification.
The WGC argues that central banks in emerging markets want to use gold as a hedge against the US dollar and the renminbi, as well as currencies like the euro that face political and economic challenges.
The World Gold Council said: “Against the backdrop of persistent low and negative bond yields and limited high-quality investment options, it makes sense for central banks to turn to gold as means to increase portfolio diversification.
“But it’s not just currency risk these central banks are hedging. In an environment of heightened geopolitical tensions, gold is an attractive asset because it is not anyone else’s liability and does not carry any counterparty risk.”
Another reason central banks in emerging markets are buying gold could be to maintain a certain allocation level, as global gold reserves increase.
A third driver mentioned in the report is that some central banks are upping their gold levels because it enables them to “actively manage their liquidity or boost returns” through leases, swaps and other transactions.
Both Hungary and Argentina use their gold reserves for these purposes in order to meet short-term needs.
Speaking about the increased demand for gold, Robert Monro, Head of Business Development at , said: “We’ve been very encouraged to see Central Banks increasing gold reserves; as a gold producer at Yanfolila in Mali, we believe in the intrinsic value of gold as a commodity, as a safe haven asset and an inflation hedge.”
Listen to our podcast on why gold could be very undervalued below:
Signs of economic power shift?
But what are the potential long-term implications of these short-term gold buying trends?
The World Gold Council argues that these trends could reflect a shift away from a system dominated by the US dollar to a more diverse multipolar currency system over the next few decades.
Considering its status as an accepted asset class with a liquid market, gold could be used by central banks to adjust reserve compositions in anticipation of a rebalancing of global economic power.
And the report says this long-term shift could bring a “renewed focus” on gold as a strategically important reserve asset over the next few years.
Read more in our article 'Does The ‘Shadow Price’ Of Gold Hold The Key To Its True Value?'
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