The anatomy of global central banks: Two discrete camps
Central banks’ gold buying is not singularly focused on current market volatility. Instead, it is the result of policy decisions by two discrete central bank camps, where—at a practical level, over time—reserves have taken on some very different shapes and forms.
The first camp is the economic titans of North America and Western Europe that were financial powerhouses during the heyday of the gold standard from 1870–1970. Historically, these countries accumulated gold to back their currencies. Despite that no longer being the case, these developed countries continue to hold large volumes of gold, which collectively amounts to 70% of today’s reserves.6 Interestingly, data confirms that they have all but stopped any sales (except for coinage purposes),7 following a period of net selling during the 1990s and early 2000s. This highlights the relevance that gold has played in managing their monetary policy, despite their currencies not being backed by gold any longer.
The second camp is the rest of the world, primarily emerging markets—some large, like Russia or China, and others far smaller, like Colombia or Thailand. These smaller and developing nations have historically lacked the financial strength to accumulate large gold reserves, and by the time they started to develop further, the US dollar had established itself as the global reserve currency. As a consequence, these countries do not have large legacy gold reserves—notably under 1-2%8—with many holding a high percentage of US dollar-backed securities, like US Treasuries, which are backed by the full faith and credit of the US government.
The reserve reshuffle
But following the Asian debt crisis in 1998-1999, with the intervention of the International Monetary Fund (IMF), emerging market central banks began to diversify their reserves. And by the mid 2000s, gold started to play a more important role for these smaller banks as they looked to strengthen their domestic markets and currency. Further, policies intended to strengthen regional links among Asian countries and their emerging market trade partners have also supported diversification away from the US dollar. Based on its return, diversification and liquidity characteristics, gold has been a natural choice for these central banks, especially since the 2008-2009 financial crisis. And a recent survey of global central banks sheds some light on the multiple objectives that gold buying supports for these institutions.