Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Central banks have been big buyers of gold for over 10 years. Here is why they do it.

Central banks have been big buyers of gold for over 10 years. Here is why they do it.

A number of central banks have loaded up on gold in the last year, according to data from World Gold Council. Central banks own gold as part of their portfolios, which include foreign exchange reserves.

Gold is one of the best performing asset classes in 2020. Its status as a safe-haven in times of economic crisis, together with its tendency to profit from a weaker US dollar, has driven investors into the market in droves.

In fact, investors, via exchange-traded funds, now own more gold than most central banks.

But it's not just the likes of the hedge funds who have loaded up on gold. Central banks themselves have beefed up their own holdings, undeterred by the march north in the price.

Indeed, central banks now hold $2 trillion in gold, around 35,000 tonnes, according to Ryan Giannotto, director of research at gold-based ETF GraniteShares.

Business Insider spoke to a number of experts to find out why even central banks, generally the most cautious segment of the investment community, have bought into bullion so heavily.

Why central banks care about gold


Max Castelli, head of global strategy at UBS Asset Management's Global Sovereign Markets team, said: "Increasing exposure of central banks to hold more gold is a long-term trend which started a few years ago. There are multiple drivers supporting this trend and price is certainly one of them."

GraniteShares' Giannotto said: "Oftentimes, central banks will purchase sovereign bonds or foreign currencies for their balance sheets, but gold is simply an alternative asset to accomplish the same goal—make their currencies credible in the eyes of global markets."

Not only does gold make up part of most central banks' foreign exchange reserves, much as the dollar, the euro or the yen would, central banks can also lend it out to willing borrowers, in exchange for dollar-income.

Leigh Goehring, managing partner of natural-resources investment firm Goehring & Rozencwajg Associates, said two of the biggest official buyers of gold in the past few years have been Russia and China.

Goehring said: "Since 2008, we have seen a huge swing in central banks' gold buying." Indeed, in 2009, in the wake of the financial crisis, central banks became net buyers of gold each year and have remained so.

Trade tensions, geopolitical issues, and threats of sanctions have made central banks more reticent to hold quite such a large portion of their reserves in US dollars. "They have expressed a strong desire to diversify away from the US dollar, and gold has represented a diversifying asset class," Goehring added.

Gold buying by central banks (2017-2019)




It has been mainly emerging-economy central banks that have bought gold in the last year. But one in particular stands out.


Turkey's foray into gold


Turkey was by far the biggest buyer of gold over the last year, nearly doubling its holdings in the 12 months to June by 268.9 tonnes to 583 tonnes.

To put it in perspective, Turkey bought more gold in the year to June than every other central bank that bought combined. Even Russia, the next biggest buyer, "only" purchased 93 tonnes.

Some experts said Turkey's buying spree is partly the result of two years of economic turmoil.

Giannotto said: "Turkey is amidst a full-blown, unmitigated currency crisis, desperately trying to defend the value of its currency. The country has been running dangerously low in foreign exchange reserves after trying to prop up its own currency."

The Turkish lira has lost around a quarter of its value against the dollar since the start of the year alone. One dollar is currently roughly worth 7.3 Turkish lira. Just two years ago, it bought around 5.4 lira.

But Goehring & Rozencwajg's Goehring disagrees. He said holding gold is less about supporting the lira and more about acting as a hedge against any barrier to access US dollars.

"Should relations between Turkey and the US deteriorate further, Turkey risks further tightening of US sanctions, and an increased risk of not being able to secure US dollars to settle payment," he said.

Relations have faltered between Turkey and NATO in recent years, as allies have been alarmed by Turkey's purchase of Russian air defense exports, despite being a NATO member, as well as its presence in Libya.

Goehring added: "The US has used this strategy with other countries, including China and Russia [as] gold represents an asset class that is perceived to be beyond the reach of the US government."


Central banks to stick with gold despite recent volatility


Gold broke the $2,000 mark for the first time ever last week. It has soared since July as trade tensions between US and China rose, and investors flocked to safe havens.

But just as the rally seemed unstoppable, the price fell abruptly below $2,000 on Tuesday, in its worst daily drop in more than seven years.

But the price has since recovered somewhat. And experts told Business Insider that central banks take a more long-term view of their reserve holdings and are unlikely to significantly change their buying habits based on gold's short-term volatility.

"Whilst we expect this trend to continue – particularly if gold prices remain elevated once the current crisis is over - I do not expect central banks to become active traders of gold," UBS' Castelli said.

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Putin Celebrates ‘Unprecedentedly High’ Ties with China as Gazprom Seals Power of Siberia-2 Deal
China Unveils New Weapons in Grand Military Parade as Xi Hosts Putin and Kim
Rapper Cardi B Cleared of Liability in Los Angeles Civil Assault Trial
Google Avoids Break-Up in U.S. Antitrust Case as Stocks Rise
Couple celebrates 80th wedding anniversary at assisted living facility in Lancaster
Information Warfare in the Age of AI: How Language Models Become Targets and Tools
The White House on LinkedIn Has Changed Their Profile Picture to Donald Trump
"Insulted the Prophet Muhammad": Woman Burned Alive by Angry Mob in Niger State, Nigeria
Trump Responds to Death Rumors – Announces 'Missile City'
Druzhba Pipeline Incident Sparks Geopolitical Tensions
Cost of Opposition Leader Péter Magyar's Economic Plan Revealed
Germany in Turmoil: Ukrainian Teenage Girl Pushed to Death by Illegal Iraqi Migrant
United Krack down on human rights: Graham Linehan Arrested at Heathrow Over Three X Posts, Hospitalised, Released on Bail with Posting Ban
Asian and Middle Eastern Investors Avoid US Markets
Ray Dalio Warns of US Shift to Autocracy
Eurozone Inflation Rises to 2.1% in August
Russia and China Sign New Gas Pipeline Deal
Von der Leyen's Plane Hit by Suspected Russian GPS Interference in an Incident Believed to Be Caused by Russia or by Pro-Peace or by Anti-Corruption European Activists
China's Robotics Industry Fuels Export Surge
Suntory Chairman Resigns After Police Probe
Gold Price Hits New All-Time Record
UK Fintechs Explore Buying US Banks
Greece Suspends 5% of Schools as Birth Rate Drops
Apollo to Launch $5 Billion Sports Investment Vehicle
Bolsonaro Trial Nears Close Amid US-Brazil Tension
European Banks Push for Lower Cross-Border Barriers
Poland's Offshore Wind Sector Attracts Investors
Budapest Central European Fashion Week Kicks Off
U.S. Celebrates Labor Day
Hungarian National Team Captain Scores Epic Goal
EU is getting aggressive: Four AfD Candidates Die Unexpectedly Ahead of North Rhine-Westphalia Local Elections
Japanese Customer Sways from VW to BYD after “Unbelievable” Test Drive amid Dealership Expansion
Nestlé Removes CEO Laurent Freixe Following Undisclosed Relationship with Subordinate
Pickles are the latest craze among Generation Z in the United States.
Giuliani Seriously Injured in Accident – Trump to Award Him the Presidential Medal of Freedom
Deadline Day Delivers Record £125m Isak Move and Donnarumma to City
Nvidia Reveals: Two Mystery Customers Account for About 40% of Revenue
Woody Allen: "I Would Be Happy to Direct Trump Again in a Film"
Lula and Putin Hold Strategic BRICS Discussions Ahead of Trump–Putin Summit
White House Eyes Budapest for Peace Talks
Cave Diving Beneath the Streets of Budapest
Another American Restaurant Chain Opens in Budapest
Hungarian Opposition Politician Supports Ukrainian Commander
Opposition Leader Threatens Media Outlets
American Airlines Adds New Flights to Budapest
F1 Hungarian Grand Prix Wraps Up
WhatsApp is rolling out a feature that looks a lot like Telegram.
U.S. Trade Representative says Washington still negotiating trade deals after court rules tariffs illegal
Von der Leyen says Europe drawing up 'precise' plans to send troops to Ukraine
Kremlin accuses Europe of hindering Trump’s peace efforts in Ukraine
×