Gold has always been a valuable addition to foreign reserves around the world since ancient times. Yet, in the year 2023, central banks have demonstrated an unprecedented level of interest in purchasing this precious metal due to mounting geopolitical instability and surging inflation rates. Specifically, during the first two months of the year, central banks collectively acquired a net total of 125 metric tonnes of gold, marking the highest amount purchased for the year-to-date period since banks began net buying in 2010.
Which Central Banks hold the Highest Gold Reserves?
It may not come as a shock that the United States holds the largest amount of gold by central banks, with a whopping 8,133 tonnes. Following the US is the central bank of Germany, which holds 3,370 tonnes. Interestingly, the third top holder is not a country but the International Monetary Fund (IMF), possessing 2,814 tonnes of gold. Fourth and fifth places belong to Italy and France, holding 2,452 tonnes and 2,436 tonnes respectively. Russia, China, Switzerland, Japan, and the Netherlands round out the top 10 with their respective gold holdings.
- United States – 8,133 tonnes
- Germany – 3,370 tonnes
- International Monetary Fund (IMF) – 2,814 tonnes
- Italy – 2,452 tonnes
- France – 2,436 tonnes
- Russia – 1,944 tonnes
- China – 1,843 tonnes
- Switzerland – 1,040 tonnes
- Japan – 765 tonnes
- Netherlands – 612 tonnes
On the other hand, the lower half of the top 20 central banks in terms of gold reserves includes India, the European Central Bank (ECB), Taiwan, Portugal, Saudi Arabia, Kazakhstan, the United Kingdom, Lebanon, Spain, and Austria.
- India – 562 tonnes
- European Central Bank (ECB) – 505 tonnes
- Taiwan – 424 tonnes
- Portugal – 383 tonnes
- Saudi Arabia – 323 tonnes
- Kazakhstan – 322 tonnes
- United Kingdom – 310 tonnes
- Lebanon – 287 tonnes
- Spain – 282 tonnes
- Austria – 280 tonnes
It’s quite unexpected that the United Kingdom didn’t make it to the top 10, despite being a prominent country. The Bank of England seems to diversify its holdings more than other central banks.
GOLD vs USD: Gold offers a hedge against USD
The World Gold Council reported that central banks’ purchase of gold in February 2023 hit its highest level in 55 years. This increase in gold buying is part of a long-term trend of moving away from the U.S. dollar as the primary global reserve currency. It has also coincided with the growth of emerging economies like Brazil, Russia, India, China, and South Africa. In recent weeks, members of the BRICS economic coalition have announced their intentions to create an alternative currency, further challenging the U.S. dollar’s dominance.
Since the U.S. dollar was decoupled from gold in 1971, central banks have turned to gold during times of market uncertainty, with the precious metal serving as a hedge against the dollar. Emerging market central banks have been the main drivers of the gold buying trend in recent years, reflecting their desire for independence from the U.S. monetary system amid global tensions.
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BRICS Countries continue to be major buyers of Gold!
As you examine the list of net buyers, you’ll observe that three of them are members of the BRICS nations (Brazil, Russia, India, China, and South Africa). I’m mentioning this because we may be witnessing the emergence of a multi-polar world with a U.S.-focused world on the one hand and a China-focused world on the other, as I’ve been informing you for a few weeks now. On a purchasing parity basis, the BRICS countries’ share of the global economy has surpassed that of the G7 nations (Canada, France, Germany, Italy, Japan, the U.K., and the U.S.) for the first time ever.
In this multi-polarization, gold performs a vital role. The precious metal is required by the BRICS to support their currencies and reduce their dependence on the U.S. dollar, which has acted as the world’s global reserve currency for around a century. More and more global trade is being conducted in the Chinese yuan, and there are reports that the BRICS, which may eventually include other critical emerging economies such as Saudi Arabia, Iran, and others, are developing their own payment mechanism.
If this is true, then it seems apparent to me that investors should boost their exposure to gold and gold miners. Gold is a finite commodity that is expensive and time-consuming to produce. At the same time, the BRICS countries will continue to be net buyers as they strive to diversify away from the dollar.
Gold-backed ETFs see positive net inflows
After a continuous 10-month period of outflows, net inflows into gold-backed ETFs became positive in March, coinciding with the metal’s price approaching a new record high. Investors increased their holdings in physical gold ETFs by almost 1 million ounces (about the volume of a large U-Haul truck) during March, the largest monthly rise since March 2022, when investors added 1.4 million ounces (about half the volume of a one car garage). According to Bloomberg, the total gold holdings as of March 31 amounted to 93.2 million ounces (about the volume of an Olympic-size swimming pool).
Gold is currently experiencing a surge in demand as investors seek to hedge against weak economic news, inflation, rising rates, an unstable banking sector, and geopolitical tension, with the aim of achieving a new all-time high. On Thursday, the metal came close to achieving this goal, as its value reached $2,032 per ounce, which was only $43 short of its previous record high in August 2020.
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Which Central Banks Bought the Most Gold in 2022?
In accordance with data from the World Gold Council, here are the top five nations that led the gold buying spree and accounted for 28.45% of the overall purchase.
1. Turkey has made a major purchase
Turkish central bank acquired 147.6 tons of gold in 2022, despite ranking 11th in total gold reserves. Compared to 2017, gold reserves increased from 9.07% to 27.60% by 2022. Turkey is an upper-middle-income country and a major gold jewelry producer. A major issue has been inflation, with the CPI increasing from 48.69% in January 2022 to 85.51% in October, and 50.51% in March 2023. Q1 2023 saw the central bank acquire 45.5 tons more gold. Turkey was the second-largest gold buyer in 2017, 2018, and 2019, but fell to fourth in 2020.
2. China continues to buy
Gold purchases by the People’s Bank of China resumed in late 2022 and early 2023. Gold made up 3.5% of China’s overall reserves by the end of 2022, ranking sixth globally. China acquired 62.21 tons of gold in 2022, becoming the second-largest gold buyer, and 39.8 tons in Q1 2023. As a multi-functional asset, gold benefited China’s reserve portfolio in 2015. The value of gold in Chinese Yuan increased by 9% in 2022, but gold in US dollars remained unchanged at 0.4%.
3. Egypt enters the top five for the first time
Egypt increased its gold reserves from 11.81% to 22.89% in 2022 by buying 44.41 tons of gold. Egypt has 125.32 tons of gold, ranking 32nd globally despite being a lower middle-income economy. Since 2017, the Central Bank of Egypt has purchased 5.1 tons of gold. Due to the Ukraine-Russia conflict, Egypt’s currency devalued, foreign reserves decreased, and inflation soared. Consequently, gold demand rose to 83% in 2022 as a safe haven and inflation hedge. To boost domestic reserves and gold exports, the Egyptian government plans to increase exploration and production.
4. Qatar joins Egypt in purchasing gold in the Middle East
Qatar purchased 35.02 tonnes of gold in 2022, moving up to the top five buyers since 2001. Qatar purchased gold six times from April to September and again in November, despite selling some gold in February. 11.64% of all gold reserves are in Qatar, at 91.75 tonnes. Qatar’s economy is expected to grow by 2.4% in 2023 and 1.8% in 2024 because of gas production. A world leader in the export of liquefied natural gas, Saudi Arabia holds the third-largest known natural gas reserves.
Uzbekistan ranked 5th among the largest gold buyers in 2022, purchasing 33.9 tons, with 395.94 tons of gold reserves, making it the 13th largest globally. The central bank acquired gold for 6 consecutive years from 2013-2018, adding 185.1 tons. However, it sold 22.7 tons in 2019 and 2020, becoming a net seller. In 2021, it returned as a net buyer, adding 29.5 tons. So far in 2023, 3.4 tons have been sold. Despite being a lower-middle-income nation, Uzbekistan is a top gold producer and allocates around 60% of its foreign reserves to gold.
Russia bought a record number of gold from 2017 to 2022
The central bank of Russia was the largest buyer of gold from 2017 to 2021, although it announced that it would further increase its bullion holdings in 2022. The U.S. imposed sanctions on Russia in response to its invasion of Ukraine, which made the U.S. dollars the Russian central bank held worthless. Other countries such as Turkey, India, and China have also purchased significant amounts of gold during this period, amid potential worsening relations with the U.S.
Although Russia, Turkey, India, and China account for a significant portion of the net change in gold reserves globally from 2017 to 2022, smaller countries in the Middle East and North Africa have been buying gold at an even faster rate. Mauritania, Qatar, and the United Arab Emirates have more than tripled their gold reserves during this period, while Oman increased its once-meager gold supply by more than one hundred times.
Several upper- and middle-income countries in Central Asia and Latin America have also increased their gold positions. For example, in Pakistan, Kazakhstan, Turkey, Lebanon, and Venezuela, gold's share of central bank holdings increased by more than 15 percentage points from 2017 to 2022. Bolivia led the world with a 49% increase in gold as a percentage of central bank holdings. Globally, gold's share of total central reserve holdings rose from 9.7% to 12.9%.
Why Do Central Banks Acquiring Gold?
Many nations maintain gold reserves as part of their financial reserves. The following are three reasons why central banks are largely motivated to buy gold:
- Balancing foreign exchange reserves – In times of economic uncertainty, central banks hold gold as part of their reserves to mitigate the risk associated with currency holdings and to promote stability.
- Hedging against fiat currencies – The U.S. dollar and other fiat currencies are eroding because of inflation, and gold offers a hedge against this erosion.
- Diversifying portfolios – Gold’s inverse correlation to the dollar makes it a good asset to diversify your portfolios. There is a tendency for gold prices to rise when the dollar falls in value, protecting central banks from market volatility.
Several nations keep gold in their financial reserves to aid economic stability, and central banks buy it to do so. A record amount of gold was bought by central banks in 2022, the most since 1967.
Diversify Your Portfolio With Gold
To ensure that your investment portfolio is of high quality, it is important to continuously diversify your investments as much as possible. Diversification involves spreading your money across different types of assets, so that your portfolio’s returns are not significantly impacted when a particular type of asset performs poorly. A prime example of diversification would be investing in both gold and forex simultaneously.
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Disclaimer: Information in this report has been carefully gathered and prepared; any omissions or errors were unintentional. No positions are held by the author in the securities mentioned. It is important for investors to consider the information above as an idea, rather than as a definitive recommendation.