Why Central Banks buy more gold
News (Advertising) Arnulf Hinkel, financial journalist – 17.10.2018
Central banks worldwide purchased 193.3 tonnes of gold in the first half of 2018 – a year-on-year increase of 8 per cent. These buying activities account for 10 per cent of total gold demand and mark the strongest H1 for central bank gold purchases since 2015. Gold bullions now make for roughly 10 per cent of all currency reserves worldwide. The largest gold purchases since early 2017 were made by Russia with 383.3 tonnes, and Turkey with 125.8 tonnes. While in Turkey, this buying activity is clearly a reaction to the lira’s depreciation, the Russian strategy is to become as independent as possible from the US, and to protect the economy from the effects of possible US sanctions by buying gold. However, there are both medium-term as well as long-term reasons to increase national gold reserves that are equally important to all central banks worldwide.
Protection against foreign exchange risks and for balancing reserves
Emerging economies in particular are highly dependent on the US dollar. Due to its negative correlation to the US currency, gold is an effective hedging instrument – also against other major currencies such as the renminbi. In addition, many emerging markets increased their foreign currency reserves in the aftermath of the financial crisis. Their central banks are currently rebalancing their financial allocations in favour of gold.
Gradual transition to a multipolar monetary system
According to the World Gold Council, gold demand by central banks is likely to be influenced by the gradual shift from the US dollar-dominated system to a multi-polar one over the decades to come. In the long term, this development would also lead to a multi-currency reserve policy among central banks. Through increased hedging with gold, risks and uncertainties accompanying the implementation of the new reserve policy could be reduced. After all, it is no coincidence that for thousands of years, gold has been regarded as a particularly hard currency.