Last year, central banks throughout the world built up their gold reserves at an unprecedented rate since 1967, when the US dollar was still backed by the precious commodity.
Record purchase historically
The World Gold Council (WGC) reported that two years after falling to its lowest level in a decade, central bank demand for gold has substantially recovered, with net purchases expected to increase by 1,136 tonnes, or about $70 billion, in 2022. This demand was mostly driven by a flight to safer assets amid soaring inflation
The WGC confirmed that, after updating some of the historical data from its annual Gold Demand Trends report, this level of purchase was, in fact, the most since 1950 and the 13th straight year of net inflows.
Since the central bank buying, global gold demand last year, in general, increased to 4,741 tonnes, the highest level since 2011 and an 18% rise from 2021.
General trend of central banks around the world
During the quarter, Turkey was the top gold buyer, followed by Uzbekistan (26.13 tons) and India (17.46 tons). It is difficult to determine how much gold was bought during this time period by countries like China and Russia because they do not all consistently publish their gold purchases.
India is increasing its gold holdings as well.
Every October, Indian customers customarily buy gold jewelry in preparation for the holiday season. Putting that aside, the Reserve Bank of India (RBI) added 4 tons of gold in September and 13 tons in July, bringing its total reserves, according to the WGC, to 785 tons.
In an effort to diversify the holdings of its foreign exchange reserves, the RBI may be motivated to go on a gold buying binge.
Due to the Federal Reserve’s rapid rate increases in 2022, the Indian rupee had a significant decline versus the US dollar, falling by around 10%. However, the RBI used its foreign exchange reserves to partially absorb the loss.
An excellent hedging tool of inflation
Although some analysts think this to be true only over exceptionally long time horizons spanning over a century or more, gold is nevertheless recognized as an excellent inflation hedge.
Since the global financial crisis of 2008–2009, European banks have ceased selling gold, while an increasing number of emerging economies, including Russia, Turkey, and India, have begun to buy.
According to WGC, “this is a continuation of a trend,” said analyst Krishan Gopaul. “You can see those drivers feeding into what happened last year. You had on the geopolitical front and the macroeconomic front a lot of uncertainty and volatility.”
The coronavirus epidemic caused a decline in purchases, but in the second half of 2022, they picked up, with central banks buying 862 tonnes between July and December, according to the WGC.
However, the WGC projected that central banks’ purchases in 2023 would hardly match 2022 levels.
“Lower total reserves may constrain the capacity to add to existing allocations. But lagged reporting by some central banks means that we need to apply a high degree of uncertainty to our expectations, predominantly to the upside.”
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