In a world rife with escalating economic challenges on an annual basis and with the World Economic Forum’s Global Risks Report warning of the critical nature of addressing economic crises as the greatest immediate threat to the planet, global central banks, particularly those in emerging markets, increased their purchases of gold, which reached a record level during the first nine months of this year.
Gold Market Trends Worldwide
The demand for gold from central banks kept increasing at a record rate until the third quarter of 2023, as they bought a total of roughly 337 tons during the months of July, August, and September. This represents a quarterly increase of about 120 percent and is thought to be the second-highest third quarter ever in terms of gold demand, after the third quarter of 2022.
Figure 1: Annual gold demand by central banks (tons)
Source: World Gold Council, Gold Demand Trends Q3 2023
Figure 1 shows that, on an annual basis, central banks’ purchases of gold decreased by 27 percent to 337.09 tons from roughly 458.77 tons in the third quarter of 2022. In contrast, during the initial nine months of 2023, central banks amassed an all-time high of 800 tons of gold, representing a 14 percent surge in comparison to the same period the previous year, as depicted in figure 2.
Figure 2: Gold demand by central banks, Q1-Q3, 2019-2023
Source: World Gold Council, Gold Demand Trends Q3 2023.
The Chinese central bank increased its gold reserves by 78 tons over the past quarter, positioning it as the largest purchaser of gold in the world. The gold reserves of the People’s Bank of China have been augmented by 181 tons since the commencement of the current year, bringing the total to 2,192 tons (or 4 percent of the overall monetary reserve). Furthermore, the gold acquisition activity of the Polish Central Bank persisted, with an additional 57 tons being added to the 48 tons acquired in the second quarter. This brings the total gold accumulation for the year thus far to 105 tons. This aligns with the previously declared objective of Poland to augment its gold reserves by 100 tons. In addition, gold reserves in Turkey increased to 668 tons in the third quarter, following purchases totaling 39 tons. The Central Bank of Turkey reverted to net buying after net sales in the second quarter of this year.
Furthermore, eight additional banks acquired a minimum of one ton of gold during the third quarter, demonstrating the substantial growth in gold demand. India procured nine tons, Uzbekistan roughly seven tons, the Czech Republic six tons, Singapore four tons, Qatar three tons, Russia three tons, the Philippines two tons, and Kyrgyzstan one ton.
Motivations
Global central banks are aiming to augment their gold reserves as a safeguard against inflation and to uphold their countries’ economies and currencies. This inclination has been strengthened by swift economic transformations and heightened geopolitical strains that have presented additional obstacles. The following is a summary of the main factors that drive central banks to raise their gold reserves:
• Monetary Reserve Basket Diversification: In an effort to improve the exchange rate of their domestic currencies, emerging and developing economies have come to recognize the significance of central bank foreign currency commodity diversification and dollar exposure reduction. China was at the forefront of this trend due to its growing need to detach itself from the US dollar in the face of intensifying political tensions with Washington. This was particularly true given Washington’s long history of using the dollar as a weapon (also known as “dollar weaponizing’) to manipulate trade and international agreements and exert pressure on its opponents by imposing a series of financial and economic sanctions, which compelled emerging countries—including China—to diversify their monetary reserves.
• Dealing with the Global Inflationary Wave: The Russian-Ukrainian war caused a sharp rise in global inflation rates due to disruptions in supply chains and global trade, and the weaponization of basic commodities, resulting in sharp declines in the value of emerging market currencies. Consequently, gold has emerged as an appealing hedging instrument due to the persistently high inflation trend. According to the World Gold Council survey, 42 percent of central banks anticipate a decrease for US dollars held in monetary reserves.
• Reducing Geopolitical Tensions: The worldwide community is cognizant of the economic repercussions that persistent geopolitical tensions have. As a result, emerging markets and banks in developing countries have been the primary purchasers of gold in recent years, in an effort to bolster stability amidst economic turmoil. This is due to the fact that these regions are more susceptible to the risks associated with the evolving global economic system and the widening rift between the United States, Russia, and China.
In short, central banks have been heavy buyers of gold in recent years, particularly this year, as a hedge against the risks and shifts in the global economy caused by rising inflation and the uncertainty of economic prospects caused by geopolitical tensions around the world, which highlights gold as a tool for hedging global economic risks and shifts.
