As Central Banks Buy Gold, We Ask Why?

The reasons why Central Banks buy Gold are little understood. Yet, institutional investors buy Gold for many of the same reasons. Those are the same reasons Individual investors, like you and me, are buying Gold at a record pace.

Latest reports tell us Global central bank gold reserves have topped 33,000 tonnes. That is estimated to be one-fifth of all the gold ever mined. If Gold is not directly backing paper/fiat money today, then Gold is certainly being hoarded away in anticipation of a future Gold-backed currency. Why else do countries continue to buy Gold?

The vast majority of central bank gold holdings were acquired in the last decade, when national banks became net buyers of the yellow metal.

Central banks added 668.5 tonnes of gold to their vaults in 2019, the most since the national financial institutes became net buyers of the yellow metal in 2010.

Central Banks Buy Gold for a Number of Reasons:

•  To mitigate risk of currency fluctuations
•  As a hedge against inflation
•  To promote economic stability
•  To avoid holding currency with negative interest rates

In the latest annual survey, the World Gold Council says 88 percent of central bankers cited negative interest rates as a factor in reserve management decisions.

COVID-19, and more specifically times of crisis, were also identified as a reason to hold gold by 79 percent of survey respondents, up from 59 percent in 2019. In a financial emergency, Gold is an insurance policy, a standby asset. Central banks can sell Gold, as they have in 2020, due to unexpected financial emergencies.

That uptrend was expected for all of 2020 until COVID-19 hit. The first two quarters of the year saw positive inflows totaling 220 tonnes. However, in Q3 national banks sold off 12.1 tonnes for the first time since Q4 2010. This is an indication of just how severe the Covid-19 Pandemic has been for some countries.

Gold Hit All-Time High in August $2,063

To add to this year’s Gold demand, the rapidly rising Gold price peaked at an all-time high of US$2,063 on August 2, 2020. This garnered a great deal of media attention for an investment that is typically ignored by mainstreams media. In fact, Gold has gained more than 20% this year despite the fact the Covid-19 Pandemic worldwide has restricted retail Gold jewelry sales in lockdowns and Central Bank “emergency liquidation.” Gold investors have more than made up for the demand.

As the WGC survey notes, “Central banks and other official institutions have been a key source of gold demand since 2010. Between 2010 and 2016, average annual central bank net purchases were 470 tonnes, accounting for 11 percent of global gold demand.”

Trillions of Paper/Digital Money Created Out of Thin Air

With the massive intervention of Central Banks pulling Stocks and Bonds out of the March Coronavirus Crash, more than $10 Trillion Dollars has been pushed into the markets. Almost all of the stimulus was fake paper/digital money created out of thin air. 

Eventually, the long term impact of such an unprecedented action will surely end up in waves of inflation and loss of buying power for currencies worldwide. The U.S. has created the most stimulus by far and puts at risk the long-term stability of the U.S. Dollar as the world’s reserve currency.

Buy Gold, Buy Silver, Buy Soon.