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Central Bank Gold Demand: Fed Analysts Say It’s No Big Deal – but Are They Right?

Isaac Nuriani    |
Jun 7, 2024
  • Central bank gold demand has been at or near record levels for the last two years.
  • New York Fed analysts suggest implications of central bank gold buying are “limited.”
  • U.S. owns far more gold than any other nation.
  • State Street: Gold’s archaic qualities are partly why central banks value gold.
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Try as it might, monetary policy uncertainty just can’t seem to keep gold down these days. 

Interest rate cuts – once considered a sure thing – remain very much up in the air as economic data continues to impart very mixed messages about inflation and the underlying strength of the economy. 

In spite of the most unclear outlook – to say nothing of the fact that interest rates have been at two-decade highs for nearly a full year – gold has appreciated nearly 15% over the past 12 months and remains above $2,300 per ounce.[1] 

Analysts attribute much of the reason for gold’s notable resilience to significant demand for the yellow metal among many of the world’s central banks. Not only have central banks been net purchasers of gold every year since the financial crisis (2010), but their pursuit of the metal has gone into a higher gear over the last 24 months or so, with total acquisitions at or near record levels since that time.[2] 

There’s been no letup so far this year, either; according to recent data from the World Gold Council, central banks purchased more gold in the first quarter of 2024 than they did in any calendar-year Q1 that came before.[3] 

A lot of people see this as pretty big news. Others, however, seemed to have shrugged their shoulders at all the gold many central banks have been acquiring. Among those that seem dismissive of central banks’ voracious gold appetite is the most prominent central bank of all: our own Federal Reserve. 

To be clear, the Fed has not been a participant in the extraordinary levels of gold-buying by central banks, overall. Of course, with an existing inventory of 8,133 metric tons, the U.S. already owns more gold than any other single country on earth. In fact, Uncle Sam can lay claim to almost as much gold as Germany, Italy and France – the next three-biggest gold-owning countries – combined.[4] 

Anyway 

The Federal Reserve is continuing to shrug its shoulders at the ongoing high levels of global central bank gold demand. We know this because it seems the Federal Reserve – analysts at the New York Fed, to be precise – decided to write an article recently explaining why they don’t think any of this really matters very much, titled “Taking Stock: Dollar Assets, Gold, and Official Foreign Exchange Reserves.” 

Of course, the fact that Fed analysts addressed central bank gold-buying at all does suggest the possibility that the agency thinks something more relevant than not could be taking place with the unmistakable uptrend in central bank gold demand worldwide. 

This week, we’re going to spend some time pondering what, if any, insight we reasonably can glean from the Fed’s piece. And we’re going to do it to see if we can perhaps better understand the true relevance of all this central bank gold activity for not only central banks themselves…but for overall gold demand, more generally. 

Let’s dig in. 

State Street: Emerging Market Central Banks Remain Under-Allocated Compared to Developed Market Counterparts 

In their report, the Fed analysts detail what even they refer to as a “notable increase” in central bank gold purchases since the financial crisis, underscoring the acutely high demand level of the last few years I referenced a little earlier.[5] 

Essentially echoing the research of the World Gold Council, the New York Fed recites the three principal reasons central banks say they’re buying gold: its perceived utility as an inflation hedge; its potential to serve as a hedge against broader conditions of economic uncertainty; and its potential to help insulate at-risk countries from the impacts of sanctions applied by the U.S. and the West.[6] 

The analysts add, “We find that countries that are geopolitically less aligned with the U.S.—as proxied with their voting agreement with the U.S. in the United Nations—have tended to be the largest gold purchasers in recent years.”[7] That bit of information implies that defense against potential U.S./West sanctions could be among the more prominent reasons for the current level of central bank gold demand.[8] 

Although reiterating that “these gold purchases are certainly notable,” the New York Fed analysts decide that “the broader implications for central banks are limited.” The analysts cite three reasons to justify this contention: For all this buying, gold’s share of aggregate central bank reserves sits at just roughly 15% (based on gold’s current market value); most of the gold purchased in recent years has been by a relative handful of central banks; and, as the Fed researchers put it, “Gold retains important shortcomings as an alternative to fiat currencies.”[9]  

Among those shortcomings, in the view of the analysts, is that gold bears no interest and that a host of burdens accrue to gold owners by virtue of the fact it’s a physical asset, including challenges related to its use in transactions, its portability, storage and security.[10]  

All of that is basically true. However, in my opinion, it’s reasonable to consider that their assessments may be at least a little incomplete. 

Take the matter of gold’s share of aggregate reserves, currently. Viewed as a snapshot in time, 15% (if we go with that figure) is, admittedly, not overwhelmingly large. 

But we also know about the well-documented aggressiveness of central bank gold demand right now. We referenced earlier its consumption at record levels, as well as the fact that central banks have been net purchasers for the last decade and a half. And, importantly, analysts at State Street Global Advisors see no reason to think the rate of central bank gold accumulation will slow anytime soon: 

“The reasons driving central bank gold purchases — to diversify their reserves, improve their balance sheets, and gain liquidity from an asset without credit risk — likely won’t change given today’s increasing economic and geopolitical risks. Plus, emerging market central banks remain under-allocated compared to their developed market peers.”[11] 

With that last sentence, State Street is implying that many of the emerging/developing market central banks purchasing so much of this gold are doing so to one day match their Western counterparts in the percentage of reserves represented by the metal. 

Did You Know? Gold Makes Up Roughly 70% of Reserves at the Federal Reserve 

And to do that…they’ll have to keep buying. Currently, gold makes up roughly 70% of reserves at the Federal Reserve. The percentages of Germany, Italy and France are roughly the same.[12] But the People’s Bank of China, which purchased more gold last year than any other central bank?[13] Their gold represents just 5% of reserves – so far.[14]   

The New York Fed analysts also suggest they’re unimpressed by the strong uptick in central bank gold-buying because so much of the purchasing has been done by a relatively small percentage of the world’s central banks.  

“More than half of reported gold accumulation since 2009 was from China and Russia,” the analysts write, “with another quarter coming from a handful of emerging market central banks (Turkey, India, Kazakhstan, Uzbekistan, and Thailand).”[15] 

On its face, that statement seems indisputable. But a closer look at the data may reveal some key details missing from the Fed’s research. 

For one thing, as I alluded to a few moments ago, there are numerous central banks at which gold makes up a significant percentage of reserves already, so it’s not surprising that few of those would participate in what’s become the global central bank gold rush. 

But there’s something else. Responding on X (formerly known as Twitter) to the New York Fed’s analysis, Balaji Srinivasan – a prominent tech investor and the former chief technology officer of Coinbase – referenced the analysts’ mention of China, India, Russia and Turkey as prominent gold buyers and had this to say: 

“The Fed now admits some countries are moving to gold. But says it’s a small group. That ‘small group’ represents 3B people. So 37.5% of the world is moving away from dollars towards gold.”[16] 

In other words, implies Srinivasan, the governments and central banks that appear to be especially gold-focused currently are those that represent a large swath of the global population – and that surely means something. 

State Street: Physical Gold’s Archaic Qualities Speak to Why Central Banks Prize the Metal  

Which brings us to the third and final reason for the Fed’s eye-rolling at all that’s been made of central bank gold demand: that there are features of the metal which, as the quintessential physical asset, can make it far less convenient to use, transport and store than fiat currencies. 

It is less convenient – obviously. In the digital age, it would be silly, frankly, for anyone to suggest that physical gold is ideal in the context of ease-of-use. 

But nations that are stocking up on gold are doing so in part because it is so different from everything else out there readily being used as a monetary and investment asset. It is the very physical nature of gold – with all of the accompanying inconveniences – that not only enhances its perception as a store of value but also greatly reduces any potential counterparty risk. 

By definition, true physical assets have no issuing government to which the users of that asset ultimately are beholden. That’s a big deal. 

As State Street Global Advisors puts it: 

For institutions and governments with long time horizons, gold’s unique characteristics — liquidity, historical role, lack of default risk, homogeneity, and ubiquity — make it a natural option as a reserve asset and store of value.[17] 

And because of those features along with several others, analysts expect central banks to continue accumulating gold at a significant pace through at least the foreseeable future. Which means it’s reasonable to consider that both the nominal size of gold reserves and the percentage that gold represents of total reserves could continue to increase from here. 

That raises the possibility of potentially outsized implications for central banks…implications that New York Fed analysts right now suggest are “limited.”  

As for the potential implications for overall gold demand, those could be substantial, as well – the New York Fed’s view notwithstanding – given the impact that analysts say ongoing central bank buying is having on the market.[18]  

On that note, some retail investors who read about the potential benefits of gold that central banks seek to access may wish to access those same potential benefits for themselves – particularly if they also think central bank demand is something that could mean more than Fed analysts think it does, presently.  

Fortunately for those retail investors, purchasing high-quality gold and silver bullion is easy nowadays. Even purchasing metals on a tax-advantaged basis through a gold IRA is now a simple task (consult a qualified advisor for more on the tax implications of IRAs).  

Those individuals who may be disinclined right now to pursue an interest in gold or silver for themselves still might want to keep an eye on what happens with central bank gold demand, going forward. The New York Fed is free to make the case that what we’ve been witnessing in gold-buying among central banks is not going to be terribly consequential in the grand scheme of things.  

But while much of what Fed analysts say about the details of central bank gold consumption is technically correct, the eventual implications of that activity remain very much unknown. And if those implications turn out to be far larger than the Fed expects – to include the possibility of gold assuming a more prominent role in the global monetary system – the relevance for even non-gold-owning individuals could be something to watch.[19]

 

 

[1] CNBC.com, “Gold COMEX (Aug′24)” (accessed 6/6/24).  
[2] World Gold Council, “Gold Demand Trends Full Year 2023” (January 31, 2024, accessed 6/6/24). 
[3] World Gold Council, “Gold Demand Trends Q1 2024” (April 30, 2024, accessed 6/6/24). 
[4] World Gold Council, “Gold Reserves by Country” (May 3, 2024, accessed 6/6/24). 
[5] Patrick Douglass, Linda S. Goldberg and Oliver Z. Hannaoui, Liberty Street Economics, “Taking Stock: Dollar Assets, Gold, and Official Foreign Exchange Reserves” (May 29, 2024, accessed 6/6/24). 
[6] Ibid. 
[7] Ibid. 
[8] Neils Christensen, Kitco News, “Gold will not completely replace the U.S. dollar in central bank foreign reserves – Federal Reserve Bank of New York” (June 4, 2024, accessed 6/6/24). 
[9] Douglass, Goldberg and Hannaoui, “Taking Stock.” 
[10] Ibid. 
[11] Maxwell Gold, State Street Global Advisors, “What’s Driving Central Banks to Record Gold Purchases — and Will It Last?” (October 4, 2023, accessed 6/6/24). 
[12] World Gold Council, “Gold Reserves by Country.” 
[13] World Gold Council, “Gold Demand Trends Full Year 2023.” 
[14] World Gold Council, “Gold Reserves by Country.” 
[15] Douglass, Goldberg and Hannaoui, “Taking Stock.” 
[16] Balaji (@balajis), X (formerly known as Twitter), (May 30, 2024, 11:53 a.m., accessed 6/6/24). 
[17] Gold, “What’s Driving Central Banks.” 
[18] Jack Denton, Barron’s, “Gold Continues to Boom. The Major Buyer: Central Bankers” (April 25, 2024, accessed 6/6/24). 
[19] Willem Middelkoop, OMFIF.org, “Central banks and the revival of gold” (December 11, 2023, accessed 6/6/24). 

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