Central bank gold reserves are at their highest level in 31 years. Why?
Central bank gold reserves are currently at their highest level in 31 years, with banks reducing their exposure to the United States dollar and increasing the gold reserves they hold.
Unlike the dollar, gold does not depend on a nation’s economy and does not expose its holder to the risks posed by other financial assets.
Why is gold emerging as a preferred asset?
With years of low interest rates and money printing in the United States, the value of the dollar against gold has fallen over time. The supply of the US dollar has multiplied over the past 50 years. The supply of gold is increasing at a very low rate, due to various factors, ultimately exceeding the demand for gold.
In 1971, Richard Nixon ended the gold standard, meaning that the dollar would not be backed by gold. Over the decades, gold has served as a hedge against various macroeconomic troubles.
The main buyers of gold are the central banks of several emerging markets. Several of these economies are lagging behind their developed counterparts in terms of gold reserves. These economies have also experienced currency depreciation – therefore reducing dollar reserves while increasing the share of gold can be helpful.
According to the central bank of Hungary, the decision to buy a large amount of gold in the markets was motivated by the need to manage new risks in the global economy. In addition, Hungary’s central bank also believes that rising global debt and inflation would require a hedging instrument – gold.
“The appearance of global peaks in public debt or inflationary concerns further increases the importance of gold in the national strategy as a safe-haven asset and as a store of value,” the press release said. Hungarian central bank after the purchases.
The Polish central bank gave similar reasons for buying 100 tons of gold in 2019.
Gold adoption catalysts
According to a World Gold Council survey, for the first time in years, the main reason emerging market central banks buy gold has been the performance of gold in times of crisis.
Moreover, unlike the dollar, gold does not face any political risk problem. For example, the dollar has come under pressure in the past as countries like Russia have turned to gold due to political issues.
The Great Financial Crisis was also a catalyst in the switch to gold. Once the problems of the financial system were exposed, central banks began to explore ways to reduce reliance on the US dollar, which resulted in increased adoption of gold by central banks in emerging markets.
These banks have been net buyers of gold since 2010, dropping from 29,962 tonnes in 2010 to 35,527 tonnes in 2020. Until before the great financial crisis and the rise of China, the United States was the only dominant economy and consequently had assets denominated in dollars, and the United States dollar itself attracted the interest of central banks of other countries.