Central banks have actively and massively purchased gold in recent years. In its report published this week, UBS highlighted the continued interest in gold among central banks, underscoring its role as a hedge against inflation, a diversifier during market stress and a credible asset in times of economic turmoil.
In the wake of the war in Ukraine and the freeze of some $300 billion in Russian foreign assets, central banks, especially those from smaller countries vulnerable to Western sanctions, have increased their gold reserves.
While this trend does not immediately impact the dollar-based status quo, it signals a shift in the perception of central bank sovereignty and contributes to calls for reform in the international financial system.
At the end of 2023, central banks’ gold holdings amounted to approximately 37,000 tons, representing 16.7% of central banks’ total foreign exchange reserves. Developed countries have the largest reserves, led by the United States, Germany, Italy and France.
Still, emerging markets are rapidly accumulating gold, with notable gains by Russia and China, UBS strategists said.
These purchases are part of a broader move to diversify assets and reduce dependence on major currencies such as the US dollar, euro, Japanese yen and British pound.
The World Gold Council’s survey of reserve managers found that the long-term value of gold, its role as an inflation hedge and the lack of counterparty risk are the main reasons for its inclusion in reserves. Furthermore, gold’s daily liquidity and lack of default risk are critical in the face of rising government debt.
Discrepancies in reported gold purchases between the International Monetary Fund (IMF) and other sources such as Metals Focus highlight the sensitive nature of reserve disclosures and the likely underreporting of gold purchases by sovereign wealth funds.
Historical patterns suggest that central bank actions can significantly influence gold prices. If we compare today’s dynamics to the mid-1960s, when central banks sold gold to maintain the gold standard, today’s market is more liquid and diverse.
“Looking ahead, gold demand is receiving solid support from central banks. An additional factor for the coming years could be our prospects for a weaker US dollar. Central banks in emerging markets tend to intervene in the currency markets when their currencies appreciate against the US. dollar,” UBS said.
“With emerging market central banks potentially increasing their holdings of foreign currencies due to foreign exchange market interventions, there could be a greater need to buy even more gold.”
UBS maintains a positive view on gold, citing central bank demand, geopolitical tensions, high inflation and possibly lower US interest rates as supporting factors.
The Swiss brokerage expects gold prices to reach $2,600 per ounce by the end of the year and $2,700 per ounce by mid-2025, and recommends a 5% gold allocation to individual investors in a USD-based balanced portfolio.
