Central Banks Continue to Be Bullish on Gold

Central banks added gold to their reserves in record amounts in 2018 and 2019, but buying slowed last year with the onset of the COVID-19 pandemic. The slower pace has continued into 2021, but buying is ahead of last year as many countries continue to load up on the yellow metal. The World Gold Council projects gold will continue to play an important role in central bank reserves in the coming year.

According to the WGC’s Central Bank Gold Reserves Survey, 21% of the world’s central banks plan to add gold to their reserves in the coming year. That’s one percentage point higher than last year.

No central bank indicated that it plans to shrink its gold reserves in the coming year. In 2020, 4% of banks said they planned to sell gold.

Fifty-six central banks participated in the World Gold Council survey.

This year’s survey continues to highlight significant interest in gold amongst central banks, with the backdrop of the COVID-19 pandemic underscoring the importance of maintaining liquid, uncorrelated assets in a reserve portfolio. Inflation has also resurfaced as an investment consideration and may inform central bank asset allocation in the coming years. We believe that central banks will continue to be net buyers of gold, albeit at somewhat lower volumes than those of the previous decade.”

Why do central banks hold gold?

The number one reason is gold’s performance during times of crisis.

Central banks are also increasingly valuing gold’s performance during periods of crisis as this attribute now tops their rationale for holding gold. These results come amidst ongoing uncertainty stemming from the COVID-19 pandemic, a situation which has added significant complexity to central bank reserve management.”

Other reasons for holding gold include the lack of political risk, the fact that it is a long-term store of value, its effectiveness as a portfolio diversifier, and the fact that there is no default risk.

After record years in 2018 and 2019, central bank gold-buying has slowed in 2020 with net purchases totaling about 273 tons. It was the 11th straight year of net growth in central bank gold reserves. According to the World Gold Council, year-to-date, central banks have collectively bought between 150-200 tons of gold on a net basis.

Central bank demand came in at 650.3 tons in 2019. That was the second-highest level of annual purchases for 50 years, just slightly below the 2018 net purchases of 656.2 tons. According to the WGC, 2018 marked the highest level of annual net central bank gold purchases since the suspension of dollar convertibility into gold in 1971, and the second-highest annual total on record.

The survey also reveals deteriorating faith in the US dollar and a continuing trend toward de-dollarization.

Respondents continue to foresee long-term structural changes in the international monetary system, continuing a trend indicated in last year’s survey. Views toward the US dollar trended downward, with half of respondents saying the greenback will fall below its current proportion. Central banks continue to think that the Chinese renminbi’s proportion will increase, with 88% saying that it will grow beyond current levels.”