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Central-Bank Gold Demand: Could It Return the Asset to the Global Mainstream?

Isaac Nuriani    |
Feb 16, 2024
  • Gold accumulation by central banks remains near record levels.
  • Bundesbank officials cite gold as reason for central-bank soundness.
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Recently, we’ve spent time examining the phenomenon – probably not too strong a word – of gold staying strong in spite of interest rates that have not merely risen, but soared. 

That’s also not too strong a word. From March 2022 through July 2023, the Federal Reserve hiked America’s benchmark interest rate, the federal funds rate, 11 separate times and by a total of 525 basis points.[1] The rate increases moved the fed funds effective rate from what was almost zero…up to 5.3%, where it remains today.[2] 

And yet gold has remained resilient despite this stringent rate-tightening regime. In fact, through calendar years 2022 and 2023, when all of these rate hikes took place, gold outperformed more popular mainstream assets by a substantial margin.[3] 

Gold and other precious metals have been known to react particularly badly to rising rates for a couple of reasons. One is what’s called the “opportunity cost” of owning gold; as a physical commodity that doesn’t pay interest, the metal is broadly thought to be less attractive from an investment perspective than interest-bearing vehicles in a climate of rising rates. 

Additionally, rising rates can strengthen the dollar. A stronger dollar means that gold – which is priced in dollars, typically – becomes more expensive for buyers in other countries. Also, a stronger dollar means less potential debasement of the currency, which, for many, is a key reason for including precious metals among their holdings. 

But in this cycle of rising rates, gold has managed to not only keep from getting beaten down…it actually has strengthened in the face of these relentless rate pressures. And according to analysts, much of the reason is attributable to the extraordinary demand for the metal on the part of the world’s central banks. 

Central banks have been net purchasers of gold every year since 2010, as the dust was beginning to settle on the global financial crisis.[4] But what’s of particular interest is the extraordinary amount of gold that central banks the world over have been accumulating in the past two years. 

In 2022, central banks bought more gold that year than they did in any other year on record. In 2023, they purchased nearly as much, falling just a few percentage points short of the previous year’s total.[5] 

And the outlook for central-bank gold demand, going forward? Analysts say it’s only onward and upward from here. 

This week, we’re going to drill down on gold consumption by central banks. We’ll talk through the principal reasons why they’re buying so much of it, and, in the process, see why the nature of central-bank gold demand is such that it may help return gold to prominence as a global monetary asset…a development that could have enormous implications for individual investors. 

Central Banks Have Transformed Into Relentless Gold Buyers 

According to the World Gold Council’s recently published Gold Demand Trends Full Year 2023, the organization’s summary of global gold demand for last year, gold consumption in 2023 reached the highest level in history: 4,899 metric tons.[6] 

Of that stunning total, 1,037 metric tons of the metal were purchased by the world’s central banks…and that’s a pretty stunning number itself. That’s because it’s a mere 4% off the all-time record total of 1,081 metric tons purchased by central banks just one year before.[7] 

By all accounts, central-bank gold demand has been a fundamental driver of prices over the last two years. Analysts say that the impact of central-bank purchase activity on prices has been so strong, it’s helped the metal to push up against the downward pressure that rising real rates have exerted on prices since early 2022.[8] 

As for why central banks have been buying gold at such a furious pace, evidence suggests the biggest reason is the need to hedge and otherwise effectively diversify reserves against the consequences of economic and geopolitical uncertainty. 

More Than 90% of Central Banker Say They Own Gold to Hedge and Diversify Reserves 

Ultimately, central bank reserves aren’t naturally immune to the potential impacts of those troubles any more than are the portfolios of individual investors. That means central bank reserves tend to be managed and optimized on behalf of the same priorities with which other investors oversee their holdings: liquidity, safety and performance (although liquidity and safety typically are more important to central banks than reserves performance at any given time).[9] 

A review of the World Gold Council’s 2023 Central Bank Gold Reserves Survey reveals not only how universal that general risk-mitigation concerns are among central banks, but the degree to which they’ve elected to rely on gold as one way to address them. 

According to the report, a clear majority of central bankers say they own gold for its potential as a geopolitical diversifier, as a hedge against systemic financial risk, and for its liquidity. And an overwhelming majority of central bankers – 90%-plus – say they own gold for its potential to thrive during crises, to act as a store of value (such as a hedge against inflation), and to serve as an effective portfolio diversifier.[10]   

Aerdt Houben, director of financial markets for De Nederlandsche Bank (central bank of the Netherlands), is one example of a central banker who clearly favors gold for each of these reasons. 

“The beauty of gold is that it’s stable in value, it retains its value,” Houben said during a recent interview. “That’s one of the reasons why central banks hold gold.” 

Houben went on to characterize gold as “insurance against systemic risk,” adding: 

“If everything collapses, then the value of…gold reserves shoots up, it skyrockets.[11] 

But concern about broad-based economic and geopolitical risk is not the only driver of central-bank gold demand. Besides serving as a mechanism to hedge and diversify against those risks, gold has become popular with some central banks as a way to help them de-dollarize – to lower their reliance on the powerful U.S. dollar in order to be subject to less influence and control by Uncle Sam.  

De-Dollarization Developments: China, Russia and Iran Continue Focused Efforts at Dumping the Greenback 

By decreasing their exposure to the dollar, nations can, in turn, have decreased exposure to the potentially adverse consequences of U.S. monetary and fiscal policy, as well as to the risk of suffering U.S. sanctions should those countries run afoul of America’s foreign-policy interests. And by explicitly holding more of their central-bank reserves in gold, they’re storing those resources in an asset that provides liquidity without credit or counterparty risk, preventing any government from controlling functional access to it (the way the U.S. government can control functional access to the dollar, for example). 

A shift away from the dollar and into a politically and governmentally neutral medium of exchange like gold among central banks appears to be part of a wider movement toward de-dollarization, particularly among longstanding, hardened U.S. rivals such as China, Russia and Iran.    

For example, Iran state media recently reported that Tehran and Moscow – both dealing with the impacts of ongoing U.S. sanctions – have struck a deal to ditch the dollar altogether in bilateral trade and use their national currencies instead.[12] 

At the same time, Russian Prime Minister Mikhail Mishustin announced that China and Russia have almost entirely stopped using the dollar in trade between the two nations. Mishustin noted that more than 90% of trade is now settled using either the Russian ruble or the Chinese yuan, adding that the development “demonstrates almost full de-dollarization of economic ties.”[13]  

Notably, the Bank of Russia and the People’s Bank of China (PBoC) also have been, far and away, the largest gold buyers among central banks over the last two decades.[14] And for its part, the PBoC was the number-one central-bank gold buyer last year, increasing its inventory by 225 metric tons…the PBoC’s highest calendar-year total in nearly a half-century.[15] 

It appears the PBoC has no intention of ending anytime soon its drive to stock up on gold, either; the World Gold Council reported just days ago that China’s central bank was a net purchaser of the metal for the 15th consecutive month in January.[16]    

But as compelling as the desires to hedge and de-dollarize are, do they represent the only reasons why central banks are acquiring gold at a stunning pace right now? Some analysts say, “No,” suggesting the need of central bankers to shore up their balance sheets is yet another reason they’re loading up on gold at such a furious pace. 

Think Tank: Central Banks May Be Acquiring Gold to Help Keep Their Own Financial Houses in Order 

What’s going on with the balance sheets of central banks? 

You may know that the rise in interest rates since the beginning of 2022 has led to bondholders suffering massive losses, as the value of the instruments has been sinking against newer issues paying higher interest. 

As it turns out, this has been a problem for central banks, as well – which some people might see as ironic considering it’s central banks that have been raising the rates to combat inflation. 

“This has damaged the validity of government bonds as a core element of central banks’ reserves,” the Official Monetary and Financial Institutions Forum (OMFIF), a think tank devoted to central banking, noted recently.[17] 

Our own Federal Reserve has not been spared these impacts. Since September 2022, the Fed’s operating losses have totaled nearly $117 billion, while unrealized losses on the portfolio have reached roughly $1.3 trillion.[18]   

In fact, according to a recent paper published at the Hoover Institution, if the Fed was a private-sector bank, it would be facing takeover, bankruptcy or liquidation.[19] 

Other central banks don’t appear quite as comfortable with the beating their balance sheets have taken over the last two years, and have no reservations about pointing to their vastly expanded gold reserves as a resource to help reassure the public that all is well. 

In fact, the OMFIF recently suggested, “Gold-holding central banks in Europe seem likely to resort (either formally or informally) to using their gold revaluation accounts to plug balance sheet losses to be unveiled in coming years.”[20] 

Germany’s Bundesbank: Our Gold Reserves Have Helped to Ensure the Central Bank’s Balance Sheet “Is on Firm Ground”  

Central bankers at the Bundesbank – Germany’s central bank – are one example of that concept in action. In 2022, the Bundesbank recorded its first operating loss in 40 years, to the tune of $183 million, while total assets fell by roughly $116 billion.[21]  

While acknowledging during a press conference in 2023 that “the Bundesbank sustained exceptional financial burdens” the previous year, representatives pointed to the central bank’s gold revaluation account – an accounting item (part of net equity) that tracks unrealized gains of the bank’s gold assets – as a reason why the Bundesbank remained fundamentally sound.[22] 

“The most important revaluation item is the reserve for 3,355 tonnes of gold,” said Joachim Wuermeling, Bundesbank executive board member. “In fact, the value is about €180bn (roughly $194 billion) above the cost of purchasing it, so this is a reserve for us…and it’s part of the considerable owned funds of Bundesbank.”[23] 

Wuermeling added, “The balance sheet of Deutsche Bundesbank is on firm ground, and this certainly makes it easier for us to bear losses over a certain period of time.”[24] 

There it is: A Western central bank publicly crediting its gold reserves for helping to ensure the stability of the institution. 

As for where central-bank gold demand goes from here, analysts say the factors prompting central banks to accumulate so much gold – such as the fortification of their own financial houses – are likely to remain relevant for at least the foreseeable future. 

“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,” State Street Global Advisors recently noted, adding that: 

This should support the outlook for global gold demand beyond traditional consumer and investor demand sectors and provide further diversified support for gold’s long-term price outlook.[25] 

If analysts such as those at State Street are right, there could be significant implications for gold – as well as for anyone who owns it. Among them could be retirement savers, who have the opportunity to not only own physical gold but do so on a tax-advantaged basis through a gold IRA 

Recently, the OMFIF recently went as far as to suggest that the level at which central-bank gold-buying now is taking place means that “gold has regained a solid yet unofficial role in the world’s monetary system.”[26] That may be a matter of opinion. But what is not a matter of opinion is that central banks have been buying gold at the fastest rate on record over the last two years. And if that general level of demand continues – as State Street and others expect – it could prove to be particularly good news for the metal’s prospects well into the future.   




[1] FederalReserve.gov, “Open Market Operations” (accessed 2/15/24). 
[2] Federal Reserve Bank of St. Louis, “Federal Funds Effective Rate” (accessed 2/15/24). 
[3] FederalReserve.gov, “Open Market Operations.”; StockCharts.com, DQYDJ, “Calculators” (accessed 2/15/24). 
[4] Gold.org, “Gold Demand Trends Full Year 2023” (January 31, 2024, accessed 2/15/24). 
[5] Ibid. 
[6] Ibid. 
[7] Ibid. 
[8] Goehring & Rozencwajg, “Rising Rates and Robust Gold Demand?” (February 2, 2024, accessed 2/15/24).  
[9] NewYorkFed.org, “Foreign Reserves Management” (accessed 2/15/24). 
[10] Gold.org, “2023 Central Bank Gold Reserves Survey” (May 30, 2023, accessed 2/15/24). 
[11] Jan Nieuwenhuijs, Gainesville Coins, “Dutch Central Bank Admits It Has Prepared for a New Gold Standard” (November 17, 2023, accessed 2/15/24). 
[12] IRNA.ir, “Iran, Russia agree to ditch dollar, trade in national currencies” (December 27, 2023, accessed 2/15/24). 
[13] Jennifer Sor, Business Insider, “China and Russia have almost completely abandoned the US dollar in bilateral trade as the push to de-dollarize intensifies” (December 21, 2023, accessed 2/15/24). 
[14] Govind Bhutada, World Economic Forum, “Here’s how central banks have used gold in the last 30 years” (March 20, 2023, accessed 2/15/24). 
[15] Gold.org, “Gold Demand Trends Full Year 2023.” 
[16] Ray Jia, Gold.org, “China’s gold market in January: wholesale gold demand jumped, official gold reserves rose further” (February 14, 2024, accessed 2/15/24). 
[17] Willem Middelkoop, OMFIF, “Central banks and the revival of gold” (December 11, 2023, accessed 2/15/24). 
[18] Bob Fernandez, Wall Street Journal, “Pro Take: Fed Operating Losses Are Piling Up Amid Higher Interest Rates” (December 7, 2023, accessed 2/15/24). 
[19] Andrew T. Levin and Christina Parajon Skinner, Hoover Institution, “Central Bank Undersight: Assessing the Fed’s Accountability to Congress” (February 8, 2024, accessed 2/15/24). 
[20] Middelkoop, “Central banks and the revival of gold.” 
[21] Reuters.com, “Bundesbank posts first loss in over four decades as higher rates bite” (March 1, 2023, accessed 2/15/24); Bundesbank.de, “Bundesbank taps its risk provisions for 2022” (March 1, 2023, accessed 2/15/24). 
[22] Bundesbank.de, “Bundesbank taps its risk provisions for 2022.” 
[23] Ibid. 
[24] Ibid. 
[25] Maxwell Gold, State Street Global Advisors, “What’s Driving Central Banks to Record Gold Purchases — and Will It Last?” (October 4, 2023, accessed 2/15/24). 
[26] Middelkoop, “Central banks and the revival of gold.”  

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