Why Central Banks Are Increasingly Buying Gold

Already consistent buyers for decades, why has there been a groundswell of renewed interest among nations in recent years? Find out their motivations here.

On the face of it, central banks might not seem all that interested in gold. Barring a select few economies, one will rarely hear central banks praising gold as a cornerstone of their nation’s prosperity. Yet a closer look into who’s buying gold bullion, along with the why, tells quite a story about the interest central bankers have in hoarding the metal.

While the gold market may come off as driven by investor and retail purchases, it is in fact central bankers that have been the strongest under pinners of gold’s price over the past decade. Since 2010, central banks around the world have turned into strict net buyers, purchasing bullion by the ton on a monthly basis.

Central bank purchases of gold have taken center stage in 2018 and 2019, when the official sector bought an annual record of 650 tons of gold during each respective year. The ramped-up purchases were especially curious to market watchers, as various countries that have either been absent from the gold market for years or haven’t shown much interest in it suddenly jumped on the train with multi-ton purchases.

As GraniteShares’ CEO Ryan Giannotto recently noted, central banks now own an astounding $2 trillion of gold bullion. According to experts like Max Castelli, head of global strategy at UBS Asset Management’s Global Sovereign Markets team, and Leigh Goehring, managing partner of natural-resources investment firm Goehring & Rozencwajg Associates, different central banks have different reasons for accumulating bullion.

The case of Russia’s double-digit tonnage purchases on a monthly basis has been well documented. Russia’s desire to move away from the U.S. dollar and shield itself from possible sanctions by acquiring an asset with no counterparty risk is a matter of public domain. And while Russia has been spearheading central bank gold purchases by a wide margin for years, it has recently been joined by China, which not only became a regular buyer but also overtook Russia in terms of purchase weight. Not coincidentally, China’s reemergence in the gold market happened right as trade relations with the U.S. plummeted and threats of levies and sanctions became prominent.

Goehring believes that Turkey, another persistent top buyer, is also spurred to hoard gold due to deteriorating relations with its Western allies. However, Turkey has an additional powerful motive to buy gold, as it is currently in the midst of a currency crisis.

In a broader sense, the reasons for central bank gold buying are fairly straightforward. While nowhere near as strong as in the case of Russia, a desire to move away from the dollar has been made clear by central banks around the world. For many nations, especially emerging markets, owning heaps of gold serves to legitimize their own currency. And, as has often been stated, gold hoards have historically served to solidify a nation’s footing on a global stage, perhaps best exemplified by the Federal Reserve’s massive gold reserves that far outweigh those of gold-loving Russia and China.

As Castelli and many other experts noted, with their long-term outlook, central banks also view gold as a bargain purchase at current prices. Gold’s price bottomed out in 2018, the very same year when official-sector purchases began to double. And, despite gold’s recent climb above a new all-time high, Castelli and his firm believe that the trend of central bank net buying is one that will stick around for some time.