In September 2023, China’s central bank, the People’s Bank of China, added 840,000 ounces of gold to its reserves. This marked the 11th consecutive month that the central bank has increased its store of physical gold.
China is far from alone. Central banks around the world have been purchasing massive quantities of gold fairly consistently for some time, with demand breaking records in 2022 according to the World Gold Council.
If we examine why demand for physical gold is so high among the nations of the world, we may find information that we can apply to our own diversification strategies.
Central banks have been consistently buying large amounts of gold.
Central Banks around the world made net purchases of 387 metric tons of gold in the first half of 2023, according to State Street Global Advisors, the world’s fourth-largest asset manager. The company also reports that central banks purchased a record 1,083 tons of gold last year.
And once banks buy this gold, their tendency is to hold onto it. According to the World Gold Council, central banks own one fifth of the gold that has ever been mined as of 2023.
According to one strategist, central banks are likely to continue their buying spree.
In a world filled with economic and geopolitical uncertainty, I believe one reason central banks are flocking to physical gold is for its historic use as a hedge against volatility. Maxwell Gold, head of gold strategy at State Street, has pointed out additional benefits of holding physical gold for central banks.
In a recent note, Gold wrote, “The reasons driving central bank gold purchases—to diversify their reserves, improve their balance sheets, and gain liquidity from an asset without credit risk—likely won’t change given today’s increasing economic and geopolitical risks.”
Physical gold is often viewed as a safe-haven asset, one central banks and consumers alike often rely on during times of volatility and turmoil. As this strategist points out, gold is also often used to help provide additional liquidity because gold is bought and sold around the world and does not carry any third-party risk.
Bonds, for example, require that the issuer be able to pay back the note’s amount and required interest, thereby creating credit risk, or risk of nonpayment. But unlike bonds, gold is not at risk of losing its liquidity if its issuing nation defaults on its debt.
Lastly, central banks may also be increasing their demand for gold based on the asset’s growth potential, which could serve to further expand their overall holdings.
Consumers may benefit from thinking like central banks.
Although there are obvious differences between the way central banks and consumers might handle their portfolios, some key similarities may also prove to be beneficial.
For example, I also want to diversify my assets and increase my protection from volatility, but want to maintain a certain level of liquidity in my holdings as well. This is why, like central banks, I prize having physical gold as part of my portfolio and consider it a key element in creating long-term growth and stability.
