Central Banks Embrace Gold: A Rising Trend
Recent years have witnessed a remarkable surge in central banks’ acquisition of gold. This week, UBS published a report emphasizing the enduring appeal of gold to central banks, as it serves as a shield against inflation, a portfolio diversifier during market turmoil, and a reliable asset in times of economic upheaval.
Amid the aftermath of the Ukraine war and the freezing of Russian foreign assets worth around $300 billion, central banks, particularly those from smaller nations susceptible to Western sanctions, have been bolstering their gold reserves. This shift, while not causing an immediate disruption to the prevailing dollar-centric financial order, signifies a changing perception of central bank autonomy and fuels calls for reform in the global financial system.
By the close of 2023, central banks collectively held approximately 37,000 metric tons of gold, constituting 16.7% of their total foreign exchange reserves. Developed countries like the United States, Germany, Italy, and France lead the pack in gold reserves. Nevertheless, emerging markets such as Russia and China are rapidly amassing gold, signaling a move away from heavy reliance on major currencies like the US dollar, euro, Japanese yen, and British pound.
UBS strategists note that these gold acquisitions are part of a broader strategy to diversify assets and reduce vulnerability to currency fluctuations. The World Gold Council’s survey reveals that central banks value gold for its long-term stability, role as an inflation hedge, and resistance to counterparty risks. Moreover, gold’s daily liquidity and absence of default risk make it a crucial asset in a world grappling with escalating public debts.
Discrepancies in reported gold purchases between the IMF and entities like Metals Focus highlight the secrecy surrounding reserve disclosures and hint at potential underreporting by sovereign wealth funds. Historical precedents suggest that central bank actions can exert significant influence on gold prices. Unlike the mid-1960s, when central banks sold gold to prop up the gold standard, today’s market is more dynamic and varied.
Looking ahead, UBS projects a sustained demand for gold from central banks. With the likelihood of a weakened US dollar in the coming years, emerging market central banks are anticipated to intervene in currency markets by amassing foreign currency reserves, necessitating further gold acquisitions for asset diversification.
In light of central bank demand, geopolitical tensions, mounting inflation, and the prospect of lower US interest rates, UBS maintains a bullish stance on gold. The Swiss brokerage firm forecasts gold prices to climb to $2,600 per ounce by year-end and $2,700 per ounce by mid-2025. For individual investors with USD-based portfolios, UBS recommends a 5% allocation to gold for a balanced investment strategy.
In conclusion, the surging interest in gold among central banks reflects a broader shift in global financial strategies. As central banks diversify their asset reserves and seek refuge from currency vulnerabilities, gold continues to shine as a beacon of stability and security in today’s volatile economic landscape.
