Central Banks Buy Gold for Reserve Diversification
The reasons for these purchases are pretty straightforward. Governments point to reserve diversification as the most important factor. North American and Western European economies typically hold about two-thirds of their official reserves in gold. In sharp contrast, emerging market (EM) countries tend to hold less than 5% of their official reserves in gold, with the remainder mostly in dollar-denominated assets. Most EM governments regard their reserve holdings as dangerously skewed, with a significant over-exposure to the dollar. It is that perceived imbalance they have been trying to rectify with steady gold purchases since 2010.
More recently, a second factor has emerged for several governments — anonymity. The SWIFT payments system has been used to impose sanctions, both on Iran in 2015 and on Russia in 2022, a tactic that some have described as “weaponization.” If a government perceives international sanctions as a real threat, then switching from dollar assets to an anonymous counter such as gold becomes extremely attractive.
Unidentified Gold Buyers
Most of the world’s central banks have been extremely transparent about gold purchases and sales for perhaps 20 years now. But in the latest statistics, countries that have not yet been identified were responsible for large purchases in 2022. This is likely a reflection of the current troubled geopolitical climate. Russia stopped reporting its monthly gold purchases to the International Monetary Fund (IMF) when it invaded Ukraine. In fact, it’s now Russian law that the country’s gold reserves are a state secret. China had not reported any gold dealings for more than three years when it suddenly resumed filing with the IMF, declaring purchases in November and December. Both countries had ranked among the biggest buyers since central bank activity in gold turned net positive in 2010. Similarly, Afghanistan has not reported any gold transactions since the Taliban takeover.
This lack of transparency has not gone unnoticed, but historically is not unusual for central banks, either. For example:
- Japan bought approximately 300 metric tons of gold in 1986 for the minting of coins to commemorate Emperor Hirohito, and did so in complete secrecy. The markets suspected a big buyer, but weren’t able to identify that it was Japan for months.
- The Reserve Bank of Australia sold several hundred metric tons in 1997, following a policy decision that gold was no longer an appropriate asset for government reserves. The markets were completely unaware of the transaction until it was announced months after the fact.
- China has, in the past, been especially elusive. Since 2001, it has announced multiple significant increases in official reserve gold holdings, all revealed after the fact. China only began regular monthly reporting to the IMF after the yuan was admitted to the Special Drawing Rights system in 2016.
Will 2023 Gold Buying Continue the Record Pace?
It will be tough to match the extraordinary 2022 performance, but the World Gold Council’s Gold Demand Trends report indicates that central bank purchases are expected to remain strong in 2023. If history is any guide, continued strong central bank purchases could provide support for higher gold prices.