Global Central Bank Demand for Gold

In a recent publication by the Visual Capitalist, a visualization and an analysis of 30 years of Central Bank demand for gold was presented. The timeframe covered is 1992 to 2022.  In this piece, a clear visual split from the periods of 1992 until about 2010, whereby Central Banks were net sellers of gold. Then, markedly in 2010, Central Banks became net buyers.  And the pace at which buying occurred saw a sharp increase in 2022, with a record setting 1,136 tons of gold purchased in that year alone. 

Who was doing this buying since 2010? It appears emerging economies accounted for the bulk of the purchases. Why would they buy gold; what function would it serve a central bank capable of fiat currency printing?

Central Banks hold gold for three primary reasons:

1. Hedge against fiat currencies - Central Banks hold a variety of currencies. By holding gold, Central Banks can reduce their concentration risk from any one currency. The risk of the currencies being a decline in purchasing power by a fiat currency due to inflation or some other issue.

2. Balance foreign exchange reserves - if Country A trades a lot with Country B, A sells and B buys, then country A over time will accumulate a lot Country B’s currency. Converting Country B’s currency into gold will act as an intermediary by which other conversions from gold into the currency of Country A’s choice is made. 

3. Diversify portfolio - Central Banks hold a variety of assets including sovereign debt, fiat currencies of various countries, other select assets, and gold. Gold has historically retained its purchasing power in times of uncertainty or high inflation, and therefore is seen as a diversifying asset, uniquely different from fiat currencies.

In conclusion, since 2010, Central Banks have been increasing purchases of gold. If that is the case, then are the Central Banks concerned with inflation? In our next edition, we will explore inflation in more detail to better understand what has been happening historically and if that helps explain the marked change from net seller of gold to net buyer by Central Banks.