In past editions of “Gold News & Views,” I’ve discussed why I think we should be paying close attention to central banks and their increased demand for gold. In short, a small number of central banks have been buying vast quantities of gold. This may suggest that nations are trying to further diversify their assets, but if we look deeper, we may also discover potential reasons why they may want to diversify and why they’re doing it now.
Central Banks May Generate Record Demand for Gold in 2023.
In October 2023, China’s central bank, The People’s Bank of China (PBOC), bought 23 metric tons of gold. While this sounds like a staggeringly large amount of gold, this purchase isn’t unusual for the PBOC or central banks in general.
In the first nine months of 2023, according to data collected by the World Gold Council, the banks of nations across the world bought around 800 metric tons of gold. This is more than central banks bought in the first nine months of 2022, a year in which central banks bought a record 1,081 metric tons of gold.
And 2023 could be on track to eclipse 2022 with a new record-breaking amount of central bank gold, according to John Reade, chief market strategist at the World Gold Council. Central banks have also been enthusiastic purchasers of gold over the past decade. The question is, why?
U.S. Money Reserve’s Director of Education, Brad Chastain, has a theory as to why central banks are buying record amounts of gold.
I spoke with our Director of Education, Brad Chastain, about the phenomenon. He outlined a very simple yet significant motivation for countries to buy gold.
“It’s no secret that many countries want to reduce their dependence on the U.S. dollar because of the risks it poses to them,” Chastain said. “The difficulty they face is that there isn’t another fiat currency that can fulfill the dollar’s role in global trade. As the world’s reserve currency, the dollar intermediates transactions between foreign countries. However, gold is highly liquid and something that can be easily traded directly into other currencies without the need for the dollar to intermediate. While central banks haven’t needed to utilize gold for that purpose yet, since the 2008 Global Financial Crisis they’ve increasingly viewed gold as a way to reduce their dollar-related risks to better navigate any other monetary crises.”
This aligns with thoughts I’ve shared in the past. As countries seek to reduce their dependence on the U.S. dollar—and thereby reduce the power of sanctions by the United States government—they are going to need to move into something else. Gold, not controlled by any one nation that could dilute it by inflation or easily neutralize it with sanctions, will become increasingly important in the world of international trade and finance—as well as a way to defend against economic sanctions.
Take Russia, for example. Back in March 2022, The Telegraph reported that Russia had quadrupled its gold holdings since 2010 to “ward against the possibility of increased Ukraine-related sanctions.” Then, just this past week, on November 11, 2023, The Telegraph reported that the U.K.’s National Crime Agency (NCA) has “issued a red alert warning that Russia was increasingly using gold to avoid sanctions.” Specifically, the NCA alleges that a gold trader based in the United Arab Emirates has traded $300 million in Russian gold since the onset of the war in Ukraine—the gold comes in from Russia and then is melted down, produced as new gold products, and resold without any sign of its true origin.
What do these trends mean for gold in the long term?
Whether they’re looking for an illicit source of funds, trying to distance themselves from the power of the dollar, or merely trying to protect their nation’s wealth against future recessions, central banks are increasing their demand for gold. And an increase in demand for physical gold can mean an increase in the price of the precious metal.
Andrew Addison, analyst and author of The Institutional View, a technical research service, projects that the price of gold might advance to “$3,500/oz. or more” in an article published by Barron’s on November 1, 2023.
If the global trends we’re seeing today are set to continue, now may be the time to take a greater position in gold.