Why Central Banks Buy Gold

Gold has been a prime constituent in the make-up of global national reserves since time immemorial.

It has been described by some as an irrelevance in this day and age, but still global central banks continue to increase their holdings regardless – a table of the top 10 national holders of gold, and the size of their official holdings as reported to the International Monetary Fund, is set out below. However, the accuracy of some of these figures may be in doubt as the reserve totals are not independently audited.

Table: Top 10 national central bank gold holders as reported to the IMF

		Metric tons	% of reserves**	Holdings as of
1	United States	8,133.5	66.2%	Jan 2022
2	Germany	3,359.1	66.2%	Jan 2022
3	Italy	2,451.8	62.9%	Jan 2022
4	France	2,436.5	58.3%	Jan 2022
5	Russian Federation	2,298.5	21.0%	Jan 2022
6	China, plus Hong Kong	1,950.4	3.3%	Jan 2022
7	Switzerland	1,040.0	5.4%	Dec 2021
8	Japan	846.0	3.5%	Jan 2022
9	India	755.4	7.2%	Jan 2022
10	The Netherlands	612.5	55.7%	Jan 2022

Source: IMF, World Gold Council

China, for example, has been reticent about the real size of its gold holdings. Now, the Russian central bank, which has recently announced it is adding to its reserves again after an almost 2-year hiatus, seems to be likewise reticent about new purchases too. The USA and the top European reserve holders have not announced any changes in their holdings for many years, which may skew perception of their current totals too.

Central banks are now believed to hold more than 35,000 metric tons of gold, about a fifth of all the gold ever mined. Gold has been built into our psyche as perhaps the ultimate measure of wealth through folklore, nursery rhymes and fairy tales.

For central banks, particularly in the current turbulent global financial circumstances, it helps to diversify their assets.It is thus not dependent on the swings in relative values of currencies, which might comprise the bulk of other central bank holdings. This can hold true for the individual holder for whom it has value historically as a reliable protector of assets, and not usually as subject to the big value swings that can affect other asset classes in turbulent economic times.

With markets at perhaps their most unpredictable in years, this may be an auspicious time to buy gold. In fact, it’s no wonder the US claims to hold far and away the largest gold reserves of any sovereign nation or supranational institution.

However, we should probably be mindful of countries like China, which appears to be keen to supersede the US as the world’s leading economy. It is thought to be mining and stockpiling gold probably at a faster rate than any other nation.

Not only is China perhaps leading the pack in annual imports as well as gold production, leaving nations like Germany, Italy, and France in their wake, it isn’t exporting (at all), and are encouraging private companies to do the same.

Some believe that China may already have surpassed Germany, which has been thought to hold the second-highest gold reserve in the world, and that it is poised to overtake the U.S. sometime in the not-so-distant future if this trend is correct, and continues.

Russia too is perhaps the world’s second largest gold producer and is again adding to its gold reserves, although it seems reluctant to let the world know quite by how much. If China and Russia are indeed both building their gold reserves there has to be a large part of the world confident that gold still has a major role to play in the future global economic structure.

Recently, European Union members Poland and Hungary have also been making significant additions to their holdings as have India, Kazakhstan, and Turkey.

Indeed, Hungary’s central bank made a statement, at the time of its March 2021 purchase, which tripled its total gold holdings to 94.5 metric tons, which gives a good insight into the asset’s modern-day relevance as well as its enduring appeal.

It said that managing “new risks arising from the coronavirus pandemic” played a major part in the bank’s decision, while “the appearance of global spikes in government debts or inflation concerns further increase the importance of gold in national strategy as a safe-haven asset and as a store of value.”

How much more so will the Russia/Ukraine invasion have added to global geopolitical uncertainty and the relevance of this reasoning, particularly with the conflict occurring just across the Hungarian border, which brings political risk factors extremely close to home!

As we all know, there is a saying, “They who have the gold make the rules.” At Rosland, every day we help people make their own rules by guiding them through the straightforward process of buying and holding gold among one’s personal assets and as a potential prime asset protector against geopolitical and geo-economic uncertainties.