Central banks have been accumulating gold at a record pace for the last couple of years. While this is a recent phenomenon, some of the answers why are nearly as old as gold itself. But to discern the real reasons, we will have to look beneath the surface of what is often reported, and dig deeper to discover the truth.
Today we will look at some of these reasons, and how these same factors may affect individual gold investors as well. Sometimes by looking back we can gain insights about what may be ahead. This certainly seems to be one of those times.
When we look at the graph above, we can see that economic turbulence and war appear to be influencing the desire of central banks to accumulate gold. Central banks were net sellers of gold from 1995 until immediately after the Great Financial Crisis (GFC) of 2007-8. In early 2009, they switched from being sellers of gold, to purchasers of gold.
That trend of purchasing gold has continued ever since. If you think back to the conditions during and following the GFC, you might remember that the issues were not solved back then. In many respects, they were merely “papered over”, with one bailout after another (TARP, Quantitative Easing (QE), etc).
The Pandemic
In 2019, as central banks began to lighten up on purchasing gold, the world began to grapple with the COVID-19 pandemic. This led to more economic uncertainty, and additional bailouts (more money printing and currency creation). The difference this time, was the bailouts were also directed towards individuals in the form of “stimulus payments”.
One of the effects of more money chasing fewer goods and services has been inflation, which has impacted the residents of every nation on earth, as well as the price of gold. But something else happened that caused central banks to begin purchasing record amounts of gold the last couple of years, beginning in 2022.
War and Conflict
After the GFC, central banks were purchasing an average of 118 tons of gold per year, for 12 years. This amount of gold helped create more financial stability in the face of economic turmoil and the aftermath of the pandemic. But something else triggered the purchasing of gold in record amounts. While at first glance some might say “it started when Russia invaded Ukraine on February 24, 2022”, I believe we have to look beyond the military conflict, and consider the economic conflict that ensued.
If you think about it, we had been involved in a military conflict non-stop for the previous 20 years, without having that type of impact on central bank gold buying. I believe there is more to this story than military conflict. Economic warfare might be a greater contributor to the cause of central bank gold buying.
The Effects of Sanctions on Gold Purchases
Even before Russia and Ukraine were fully embroiled in a military conflict, the economic conflict between the United States and other parts of the world was in full swing. We discussed it in real time, in the linked article above. I believe the not-so-veiled threat of confiscating the dollar-based reserves of other nations, has been a main driver of record-breaking central bank gold purchases for the last couple of years.
Central banks have more than doubled the average gold purchases since 2022, from 118 tons/year (2010-2021) to 291 tons/year (2022-present). This economic conflict has dovetailed with the expansion of the BRICS+ coalition of nations, and helped drive the increased demand for gold among world central banks.
Central Banks vs Individuals Buying Gold
A great question for us to ask at this point, is what impact central banks stockpiling gold could have on individual gold investors. Central banks typically have deep pockets. If they are actively buying gold, it reduces the amount of gold available to individuals to purchase, and helps increase the price of gold. Since central banks began making record gold purchases 3 years ago, the spot price of gold has increased 47%, from $1,818 to $2,673 an ounce.
We recommended following the lead of central banks as individuals, by purchasing gold. Those who did so grew the assets on their balance sheet, just like the central banks did. As of the time of this writing, the most recent data available from the World Gold Council indicates the buying continues, with central banks adding another 53 tons of gold in November alone.
I believe what the central banks recognize is that economic and military conflicts are likely to continue, and gold is a great hedge to help shore up national finances in a time of crisis. The incoming administration has expressed a desire to end some world conflicts within the first 24 hours of taking office on January 20.
I truly wish them well, and hope they can. But the sad reality is that there are forces at work, and entities that profit from turmoil and conflict, who are not likely to go away quietly. I believe we are likely to continue to experience inflation in the broader economy, and as individual investors. Gold’s history of protecting purchasing power and preserving wealth is unrivaled in human history, and is likely set to continue to do so.
Expanding Beyond Dollars
Dollars used to be the currency of the world, making up 73% of global foreign exchange reserves. Today the dollar makes up only 58%, while gold continues to increase in importance as a reserve asset. Another reason central banks are adding gold, is to increase an allocation to an asset that appreciates versus dollars. While the dollar is often one of the strongest currencies in the marketplace, it is still devalued over time when compared to gold.
Holding dollars has historically helped central banks protect their reserves from other depreciating world currencies. They are rediscovering that holding gold can help them protect their reserves from depreciating dollars as well. This is a lesson that you and I can also learn.
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byBill Stack