Central banks load up on gold in response to rising geopolitical tensions

Central bankers who manage trillions in foreign exchange reserves are loading up on gold as geopolitical tensions, including the war in Ukraine, force them to rethink their investment strategies.

An annual survey of 83 central banks, which manage a combined $7 trillion in currency assets, found that more than two-thirds of those surveyed thought their peers would increase their gold holdings by 2023.

Bullion tends to become more attractive in times of instability and demand has skyrocketed over the past year. The amount of gold bought by central banks pink by 152 percent year-on-year in 2022 to 1,136 tonnes, according to the World Gold Council, a trade body.

The majority of surveyed reserve managers ranked geopolitical risk as one of their most important concerns, second only to high inflation, according to the HSBC Reserve Management Trends Survey published by Central Banking Publications.

More than 40 percent of those surveyed listed it as one of their top risk factors, compared with 23 percent in last year’s survey.

About a third of those surveyed had changed, or planned to change, the assets they buy due to tensions such as Russia’s invasion of Ukraine and worsening US-China relations.

Column chart of Tons showing central bank gold purchases reached their highest level since 1967

Víctor Méndez-Barreira, author of the survey, said Russia’s large-scale invasion of Ukraine had created a “factor that reserve managers now need to take into account.”

The invasion prompted the Western alliance of the US, UK and EU to implement sweeping financial sanctions against Moscow, including measures to freeze around $300bn in Russian central bank assets. The central bank’s gold reserves did not fall into the direct scope of the sanctions, as they were stored in Russia.

Figures from the World Gold Council show that many purchases made over the last year have been made by central banks in countries that are not aligned with the West.

The People’s Bank of China bought 62 tons of gold in November and December 2022, bringing its total bullion reserves above 2,000 tons for the first time. Turkey’s official gold reserves increased by 148 tons to 542 tons during 2022. The council also listed Middle Eastern and Central Asian states as “active buyers” of gold last year.

John Reade, chief market strategist at the World Gold Council, said the sanctions against Russia’s central bank had “caused many non-aligned central banks to reconsider where they should hold their international reserves.”

He added: “Countries have recognized that gold held by Russia, because it is out of anyone else’s control, is useful in situations where it may not be able to access other reserves.”

While Russia’s gold was stored at home, many central banks keep their reserves abroad, including at the Bank of England and the New York Federal Reserve, reflecting the status of London and New York as the trading markets. larger gold.

Gold was also seen as an effective hedge against high inflation, the top concern of more than 70 percent of those surveyed. The price of bullion is now close to an all-time nominal high, following the rise in inflation over the course of 2022.

Most of the respondents said that the renminbi would become a bigger part of international reserves during the rest of this decade.

The president of the European Central Bank, Christine Lagarde, warned in a speech last week that the ruptures between the US and China threatened the leadership positions of the dollar and the euro in the management of world reserves.

According to the IMF data, the dollar accounted for 58 percent of all central bank reserves during the fourth quarter of last year. The euro accounted for just over 20 percent and the renminbi for just 2.7 percent.

The survey was conducted between February and mid-March 2023.

Additional reporting by Harry Dempsey

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