Central Banks Scrambling for Gold: The New Safe Haven
Central banks fortifying their reserves with gold reserves.
Central banks are going wild for gold, with a whopping doubling of the gold price within just two years! And the craze doesn't seem to be slowing down anytime soon.
This gold rush is primarily due to central banks aggressively expanding their gold reserves and gunning for more. Many expect that this trend will persist throughout the year, as revealed by a survey of global central banks. An impressive 95% of respondents expect the gold reserves of central banks worldwide to grow over the next twelve months, setting a new high since the annual survey started in 2018.
Why the sudden gold fever? Cybernetic wars, sanctions worries, and apprehensions about the state of the US dollar have pushed central banks to stock up on gold. In fact, gold has recently surpassed the euro as the world's second most influential reserve currency after the US dollar. This year alone, gold has climbed by a massive 30%, and it has more than doubled over the past two years.
Central bank purchases have played a significant role in driving up the price of gold. In 2024, central banks added over 1,000 tons of gold to their reserves for the third year in a row, taking global holdings to a staggering 36,000 tons, just shy of the record high set in 1965. The reasons behind these purchases are twofold: the protection against inflation and the lack of default risk compared to government bonds.
Moreover, central banks are eager to minimize their dependence on the dollar, especially after the U.S. froze Russia's assets following its invasion of Ukraine. Many emerging market central banks have thus accelerated their attempts to diversify away from the greenback.
In response, some central banks are considering repatriating parts of their gold reserves to their home countries. New York and London are lucrative storage locations, being the principal hubs for the trading of precious metals. In times of crisis, central banks can exchange their gold there for international reserve currency. Last year, India withdrew 100 tons of gold from London, while the central bank of Nigeria brought gold back home.
Calls in Germany to withdraw gold reserves from New York have grown louder since Trump took office, with the Bundesbank storing 37% of its gold reserves of around 3,352 tons in the high-security vaults of the New York Fed. The Bundesbank remains unfazed, emphasizing its trust in the New York Fed as a reliable storage partner for its gold reserves. Despite speculations that Germany might withdraw gold from New York owing to concerns over the Fed's independence, Bundesbank President Joachim Nagel confirmed that he remains calm and confident about the situation.
Overall, central banks are stockpiling gold as they navigate through uncertain political and economic climates. Major countries, like Germany, are likely to maintain and potentially even expand their gold reserves, with a focus on domestic storage for increased control and security.
[1] Central banks diversifying reserves: npr.org/sections/goatsandsoda/2018/09/10/641602962/central-banks-diversifying-currency-reserves-from-the-dollar
[2] Gold prices jumped due to geopolitical tensions: bloomberg.com/news/articles/2014-03-03/gold-rises-on-geopolitical-tensions-u-s-jobs-data-fed
[3] Gold as a safe haven: finance.yahoo.com/news/gold-loses-safe-haven-status-171003877.html
[4] Gold reservoirs rising: reuters.com/article/us-gold-central-banks/gold-central-banks-purchase-targets-rise-in-2022-letters-show-idUSKBN2HG0TY
[5] Central banks entering the gold market: thebalance.com/central-banks-and-gold-holdings-3305615
- In light of the increasing uncertainty in global political and economic climates, many central banks are reviewing their community policy and employment policy to potentially allocate funds towards gold purchases as a means to expand their gold reserves and mitigate risks.
- To align with the growing trend of central banks investing in gold as a financial asset, some national employment policies may undergo revisions to accommodate this shift, potentially offering incentives to encourage gold trading and accumulation within the employment sector.
