Central Banks Increasingly Drawn to Gold Amid Rising Concerns about Crisis, Systemic Financial Risks

Central bank gold buying looks set to continue in the year ahead. Respondents to a World Gold Council survey of these institutions show a recognition that gold holdings among their peers will continue to rise over the next twelve months. Moreover, officials expect that the composition of global reserves will shift toward gold over the next half decade. The leading rationale underlying central bank gold holdings among respondents from advanced economies was a tie between the metal’s value as an inflation hedge and its performance in times of crisis.

The thinking of officials within this survey paints a picture of rising concern, as the remoteness of gold from systemic financial risk and default risk were increasingly relevant to central banks when thinking about their allocations. Ironically, many of the issues that gold can address are ones that stem from central banks’ own doing in years when gold was not as appealing to them as it is today. This is particularly true of inflation, which is still above target in countries like the US, even as Federal Reserve policymakers are forecasting rate cuts before the end of the year.

Related ETF: SPDR Gold Shares (GLD)

The spot price of gold prices has recently come off of an all-time high reached in May, but new data from the World Gold Council’s (WGC) 2024 Central Bank Gold Reserves Survey shows that many central banks plan to continue buying gold and increasing its share of their reserves throughout the next half decade. The opinions of the 70 institutions included in the survey are likely reflective of the current market sentiment toward gold, but may also provide investors hints about officials’ feelings toward the trajectory of global monetary policy and economic stability over the next several years.

Per WGC data, the past two years have been historic in terms of gold buying at central banks. In 2023, these institutions added 1,037 tonnes of gold—the second highest annual purchase in history, trailing the 1,082 tonne buying spree in 2022. That largely reflects the sentiment among both Advanced and Emerging Market and Developing Economy (EMDE) central banks, which listed gold’s status as a store of value and inflation hedge as the most relevant factor in their decision to hold gold at 83% and 90%, respectively. Ironically, it was the actions of central banks themselves – particularly the US Federal Reserve’s – which played one of the most consequential roles in creating the inflation that surged between 2021-2022 and has remained quite sticky in most parts of the world throughout 2023-2024. MRP has long posited that inflation is a monetary phenomenon, and this allowed us to accurately project the coming of inflation rates in the “mid to high single digits” as early as January 2021 when the annual change in the Consumer Price Index (CPI) was running at roughly 1.4% and Americans were assured by the relevant authorities that any coming spike in consumer prices would be…