Central bank gold rush intensifies

Gold is attracting growing interest in an international environment marked by multiple challenges and a climate of permanent uncertainty. Progressive deglobalization and contemporary societal aspirations also accentuate the place given to an independent asset, subject to no authority. Finally, while the new world is slow to appear, it is mainly the central banks of the countries of the “Global South” which buy gold. The clear sign of profound change as many powers seek to modify the international financial system.

At the start of the year, central bank demand for gold remains at a very strong level. In January, nearly 40 tonnes of gold were purchased, continuing in recent months. In 2023, purchases continued at an extremely high pace with more than 1,000 tonnes, close to the 2022 level. Thus, the price of gold today reached a new record, in both dollars and euros. And this progression is all the more notable as interest rates rise, which historically erodes the appeal of gold due to its lack of returns.

A changing framework

In this context, China plays a leading role. Faced with the turmoil on the financial and real estate markets in the country, marked in particular by instability in the regions, the government of Xi Jinping has been increasing its gold reserves monthly for more than a year. China is now the sixth largest holder of gold in the world, although its total reserves are certainly higher than official figures.

More generally, a change is taking place. Unlike in past decades, it is no longer the central banks of Western countries that accumulate the most gold but those of Eastern countries, members of the “Global South”. The leading purchasing countries in January are Turkey, China, India, Kazakhstan and Jordan. Although they hold smaller reserves than in developed economies, they purchase gold at a significantly higher rate. It is the sign of a historic movement: that of the shift of the world and the rise of new countries on the international scene. Their desire to break with the hegemony of the dollar also plays a major role while the American budget deficit, the exponential increase in its debt and international conflicts increasingly threaten the stability of the greenback.

A strategic action

The attraction of these countries for gold is also the symbol of a loss of confidence in Western institutions and the unilateral rules imposed. For example, the use of the SWIFT network as an instrument of sanctions by the United States, whether on Iran in 2015 or Russia in 2022, has been a determining factor. To obtain gold, many monetary institutions hide the extent of their acquisitions from the IMF or resort to other financial instruments. Anonymity now characterizes more than 50% of central bank transactions on the gold market.

Finally, these countries of the “Global South” are also major exporters of raw materials (particularly critical raw materials) and therefore intimately aware that gold is also a real resource. Conversely, money remains a social convention that relies solely on the trust of its users. In a world where States are facing record debt levels, where rising interest rates are making repayment more difficult, holding a tangible asset like gold appears to be a stability issue and therefore a major imperative. .

As a value independent of monetary policies, and insensitive to credit or counterparty risks, physical gold constitutes a form of insurance. Lenders and investors view countries that increase their gold reserves as guarding against financial instability. A virtuous circle tends to be established allowing these countries to access foreign capital more easily and therefore to borrow at lower cost.

A new era ?

Although central banks have regularly purchased gold for several years, they nevertheless hold a much smaller proportion than in the past. While 20% of their balance sheet assets are made up of gold today, it was more than 70% in the 1980s. As financial globalization and low-cost money had helped to reduce international tensions, central banks had reduced their gold reserves. During the financial crisis of 2007-2008 (a moment of rupture which put an end to this illusion), gold represented only 10% of the reserves of monetary institutions.

Since 2008, due to international conflicts and permanent financial instability, their reserves have continued to grow. This progression should continue until it reaches, at a minimum, the average historical level of 40% gold of their total reserves within a few years.

Overall, several factors tell us that we are entering a new era for gold, very different from previous ones:

  • Demand is largely driven by public institutions such as central banks. And these purchases are closely followed by international investors.
  • Gold is breaking away from its historical relationship with the dollar.
  • The dedollarization of trade and reserves will continue to guide many countries.
  • Political and economic instability will increase, particularly this year when major elections are taking place across the world, with 60% of global GDP affected.
  • Inflation will persist in Western countries in particular, due in particular to the historic level of global debt, demographic dynamics, increasing shortages, the climate and digital transition, the return of protectionism and international conflicts.

Inflation should also stimulate private purchases. Germany appears in particular to be one of the main countries concerned. In this country which has had eight currencies in a century and where the hyperinflation of the 1930s continues to haunt the memory of citizens, gold appears as a protective asset. In the aftermath of the 2008 crisis, when bond yields were increasingly low, Germans accumulated gold at unprecedented levels. Today, despite the rise in rates, inflation is weakening the real value of interest which appears, in Germany and elsewhere, as a new source of motivation to buy gold.

Finally, the purchase of gold also reflects contemporary aspirations. At a time when interdependence between nations is diminishing as a result of deglobalization, and when the reestablishment of borders is becoming a necessity in many countries, gold, by nature free from any foreign authority, is synonymous with sovereignty. As for the individual level, the growing need for freedom in societies which tend towards permanent surveillance encourages many individuals to turn towards this independent asset. Moreover, the implementation of central bank digital currencies will have a catalytic effect…

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The information contained in this article is purely informative and does not constitute investment advice, nor a recommendation to buy or sell.

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