Central banks increasingly rely on gold

In 2022, gold purchases by central banks worldwide reached their highest level in eleven years, with a year-on-year rise of 18 per cent.  This significantly increased demand for gold on the part of central banks has not abated this year. According to recent data from the World Gold Council, gold purchases in Q1 2023 were up 161 per cent compared to the same period last year. So, are these purchases coming at the expense of other components of foreign currency reserves?

Majority of central banks expect a higher gold share of total reserves

According to recently published results of the World Gold Council’s 2023 Central Bank Gold Reserves Survey, 62 per cent of the central banks surveyed actually forecast a shift in the weighting of their foreign currency reserves in favour of gold over the next five years. This is a solid increase compared to last year’s survey, when significantly fewer respondents (46 per cent) expected a stronger emphasis on gold in the foreign currency reserves mix. 71 per cent of the central banks surveyed therefore also expect a further global rise in gold reserves in 2023, which is 10 per cent more than last year.

Is the US dollar losing significance as a foreign currency reserve?

As the global reserve currency, the US dollar has traditionally been an important – and in many cases dominant – component of central banks’ foreign currency reserves. Recent years, however, have seen two developments which might actually cause the US dollar share to give way to the precious metal: on the one hand, in view of massive international crises such as the COVID pandemic, Russia’s invasion of Ukraine and many countries’ high inflation rate, many central banks are increasing their reliance on gold as the ultimate crisis currency. On the other hand, numerous emerging countries strive to reduce their dependence on the US dollar. Geopolitical crises, such as the current US-Chinese spat over Taiwan, are further fuelling these developments.