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Central banks increasingly value gold as a safe haven in times of crisis. This is evident from a new survey by the World Gold Council among central banks. The precious metal tends to perform well during financial market turmoil because it has a negative correlation with equities at those times. Central banks also hold the precious metal as a form of diversification and due to the fact that gold has no counterparty or credit risk.
It is striking that there are large differences between central banks in their position on gold. For example, in times of crisis, the return of gold plays a much larger role for emerging economies than for Western countries (91% versus 53%). The fact that gold stocks do not have credit risk or political risk also appears to weigh much more heavily for emerging economies. Many Western central banks say they hold gold mainly because of tradition. They already have relatively large stocks and still hold them as important monetary reserves.
Reason why central banks hold gold stocks (Source: World Gold Council)
Still, central banks don't expect to buy more gold as a group than they did last year. Last year, three-quarters of all central banks surveyed expected central bank gold holdings to increase further. This year, that share is much lower at 52%. At the individual level, central banks have become more positive about Buy gold. The survey found that 21% plan to further expand their gold holdings over the next twelve months. Nor does any central bank have plans to sell gold in the next 12 months, up from 4% a year ago.
Most central banks buy their gold through the global over the counter market, where large market participants carry out gold transactions directly. Nearly a quarter buy the precious metal domestically, for example from the domestic gold mining sector. This is an attractive way for central banks to buy gold, as they can then pay for it in their own currency. The purchase of gold does not have to be at the expense of currency reserves, such as dollars or euros. Only 4% say they also buy precious metals through Exchange Traded Funds or through financial derivatives.
Central banks have slightly more reserves in gold than last year (Source: World Gold Council)
Central banks mainly buy gold in the form of 'Good Delivery' gold bars. These are bars of 400 troy ounces (about 12.5 kilos) with a purity of at least 99.5% gold, a unique serial number and a stamp of the smelter. In the world of central banks and Bullion banks this has been the most common format for decades. Of all central banks, 70% say they buy the precious metal in this form. The share of kilobars And less pure Doré gold bars are small at 11% and 7% respectively, but did increase compared to last year.
Many central banks still hold their gold with the Bank of England. On the one hand, that's understandable, because the precious metal that's there is easy to trade. Many central banks and gold banks store their precious metals in the many gold vaults in London. However, this storage location is not always obvious. For example, Venezuela has had a lot of trouble in recent years to get its gold handed over. Due to US economic sanctions, the Bank of England does not want to release the precious metal.
So there are also geopolitical risks associated with storage at the Bank of England. That may also be the reason why more and more countries are repatriating gold and storing it in their own country. Countries such as Austria, Hungary and Poland have already collected gold from abroad in recent years, while countries with large gold reserves usually store it themselves. According to the World Gold Council, 39% of the central banks surveyed use their own gold vault.
Central banks prefer to buy Good Delivery gold bars of 400 troy ounces (Source: World Gold Council)
Many central banks store their gold with the Bank of England (Source: World Gold Council)
It is also striking that many emerging economies are considering upgrading the quality of their gold reserves. Some central banks still have old Gold bars, which sometimes do not meet the highest standards in terms of weight and purity. Also, several central banks still hold gold coins (whether or not melted down into bars) in their stocks.
For example, the Dutch Central Bank still has large quantities of gold tenners, while in the vault of Fort Knox there are still many bars of melted gold dollar coins. Central banks may decide to clear these stocks if they have plans to actively trade gold again in the future.
A quarter of central banks want to upgrade their gold holdings (Source: World Gold Council)
Buying gold in combination with storage?
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