For more than a decade now, the world’s central banks have been net purchasers of gold for their official reserves, providing important support for the price of the metal. The buying, mostly by emerging-market (EM) central banks, has accounted for between 10% and 15% of total global demand. What is the outlook for this source of demand, and how long might it continue? Conversely, are there any potential central bank sellers lurking out there?
For insight into current central-bank sentiment and clues about how that may or may not change in the future, we looked at the World Gold Council’s annual central bank survey. In this year’s report, the number of central bank respondents that expect their own country’s official gold reserves to increase over the next 12 months was 25%, up from 21% a year ago. In addition, 61% of respondents believe global gold reserves will increase over the same period (see Chart 1).
Based on the survey results, it appears that the purchasing is likely to continue through at least the end of 2022, so the most recent buying trend should continue. As for potential sales out of official reserves, one country’s name has been mentioned more than any other in recent months: Russia. But there is no hard evidence to support such claims.
For more than a decade now, Russia has been one of the world’s largest purchasers of gold for reserve purposes. With this pattern of purchasing firmly established, recent comments speculating that Russia has been secretly selling gold out of its official reserves seem counter-intuitive. In my view, if any Russian gold is reaching world markets, it is far more likely to be coming out of current production rather than reserves.
Evolution of central-bank gold demand over time
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So how have the attitudes of central banks towards gold shifted? Looking at Chart 2, there are three relatively distinct trends over the past 50 years:
• nearly net-neutral from 1971 to 1988
• significant selling from 1989 to 2009
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• a major shift to purchasing starting in 2010.
Let’s take a brief look at the earlier periods as a backdrop for current sentiment.
Nearly net neutral: 1971 to 1988
While there was no significant buying or selling, the sales that did take place came from four principal sources. The USSR continued the gold sales it had begun in the 1950s in order to compensate for the failures of the command economy. South Africa began selling in 1985 when the US imposed sanctions against apartheid. The International Monetary Fund sold some gold as part of its ultimately unsuccessful bid to establish the Special Drawing Right as a major reserve currency. And the US sold some reserve gold in support of its efforts to secure the dominance of the dollar in the international monetary system.
Significant net selling: 1989 to 2009
More substantial selling began to emerge towards the end of the 1980s, and we saw net central-bank sales up every year until 2009. Some of the biggest sellers were predominantly the governments of developed markets (DMs), including the Netherlands, Belgium, Australia, Switzerland, the UK, South Africa and Canada. Towards the end of this period, some EM countries began to acquire gold for their official reserves. But these purchases were outweighed by sales, primarily from the advanced economies of Western Europe and North America. Sales gradually dwindled as this period came to a close.
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Substantial net purchasing: 2010 to today
By 2010, statistics showed small net purchases by central banks. Buying quickly gathered momentum, and net purchases have been significant for the past 12 years. Initially, the largest buyers were China and Russia, soon joined by Turkey, followed by a wide array of countries almost exclusively in EMs. Other buyers included Thailand, South Korea, Brazil, Mexico, India and Kazakhstan, joined later by Uzbekistan and Egypt. The World Gold Council survey notes a growing divide between the attitudes of central banks in the advanced economies and those in EMs.
The reasons for this spate of buying are not hard to find. During the height of the gold standard (1870–1970), the most important countries in economic terms were the UK and France, and increasingly the US and Germany. The currencies of these countries were used almost exclusively to settle international transactions, so they issued increasing amounts. Under the terms of the gold standard, these economic powerhouses had to buy large quantities of gold to back their currencies.
Even today, these economic titans of the 19th and 20th centuries still possess huge legacy gold holdings, amounting on average to over two-thirds of their total official reserves. The economically weaker EM countries had no option but to use these powerful currencies to settle international trades, and they, therefore, had no need to purchase gold to back their own currencies, even if they had had the funds to do so. Consequently, the average allocation to gold in EM official reserves is less than 5% today, with a much greater proportion in US-dollar instruments, on average greater that two-thirds, as indicated by Chart 3.
Emerging-market central banks lead gold purchasing
While many of the large, DM countries still possess huge legacy gold holdings from the days of the gold standard, EM countries have a significant amount of room to increase their gold reserves. Many EM countries believe they are still dangerously over-exposed to the US dollar — even after 12 years of substantial gold buying — and plan to continue to add to their reserves to hedge that exposure.
Central banks are likely to remain net purchasers of gold through at least the end of 2022, and that demand may have a favourable impact on the gold market.
George Milling-Stanley is chief gold strategist at State Street Global Advisors
