It remains to be seen if, in fact, interest rates start declining next year after what has been a year and a half of the fastest rate-tightening cycle in 40 years. But expectations are growing that Federal Reserve officials will be making a more dovish tilt in their application of monetary policy beginning at some point in 2024.
Asset managers appear to be filing that information away and expecting that it could prompt them to maintain a favorable outlook on gold in the coming year. According to a recent Bloomberg News survey of 12 money managers, all of them said they plan to either maintain or expand their allocations to gold over the next dozen months.
Global investment banking giants J.P. Morgan and Morgan Stanley said recently they’re bullish on gold through the near- to intermediate-term, as well, based on their mutual expectation that rate cuts are forthcoming.
Also notable is the robust outlook that the world’s central banks have on gold over the next year. According to the World Gold Council’s “2023 Central Bank Gold Reserve Survey,” 7 in 10 central banks said they believe gold reserves will increase over that time frame. It’s a marked improvement over last year, when 6 in 10 banks central banks said the same thing.
To be clear, this anticipated upswing in the outlook for gold among central banks is merely a continuation of the enthusiasm those institutions have had for gold for some time. Last year was the 13th consecutive that central banks were net buyers of gold. This year has seen central banks exhibit the same spirit toward gold accumulation: January through June saw the highest level of gold demand of any calendar first half on record.
Central banks are doing something else besides buying gold, however, that suggests just how seriously they view the importance of gold as a reserve asset now and in the future: they’re bringing it home.
For decades, it was customary for many governments and central banks to store their gold reserves outside their borders. Security is one reason; some nations felt their gold would be more secure if it was kept elsewhere.
Another reason is practical necessity. Shipping back home the massive quantities of gold that a government or central bank may purchase can raise significant logistical – and security – concerns.
But that longstanding trend has been in the process of changing for some time – and it may be gathering momentum before our eyes. A recent survey by asset managers Invesco found that the percentage of central banks now keeping their gold at home has risen substantially in recent years.
This week, we’re going to look closer at that trend. Just what are central banks and governments doing as far as repatriating their gold is concerned? Why are they doing it? And are there any lessons in this repatriation trend for individual retirement savers?
Let’s see if we can come up with some answers.
According to the results of the 11th annual Invesco Global Sovereign Asset Management Study, there’s been a surge of interest among governments and central banks in bringing their gold assets home from foreign storage. And it seems an important catalyst of that surge has been the array of sanctions lodged by the West against Russia following its invasion of Ukraine…sanctions that included freezing nearly half of Russia’s $650 billion in gold and foreign-exchange reserves.
The survey, which was conducted from January through March, polled responses from 85 sovereign wealth funds and 57 central banks that collectively manage approximately $21 trillion in assets (sovereign wealth funds are investment funds owned by governments).
“A substantial percentage of central banks are concerned about the precedent set by the U.S. freezing of Russian reserves,” the survey noted, “with the majority (58%) agreeing that the event has made gold more attractive.”
As for gold being more attractive in terms of its utility as a reserve asset, we know from the previously referenced data courtesy of the World Gold Council that demand among central banks has been rising for more than a decade now.
The results of the Invesco survey also seem to validate the idea that gold interest among central banks will remain prominent for the foreseeable future, with 41% of respondents saying they expect their own gold allocations to increase in the next three years.
Other survey responses make clear why gold’s popularity as a reserve asset seems to be growing. Of the respondents, 83% cite inflation as the biggest risk to global growth over the next 12 months, while 79% say the biggest risk to growth over the next 10 years is rising geopolitical distress. On a related point, nearly 100% of respondents who are increasing allocations to gold say they’re doing so because of gold’s capacity as a perceived “safe-haven asset.”
But the greater interest in repatriation suggests that central banks are going a step further in their relationship with gold, moving beyond a figurative embracing of the yellow metal based on its potentially beneficial properties as a reserve asset…to literal, physical possession.
The survey results reveal that three years ago, 50% of governments and central banks stored their gold at home. Now, that percentage is up to 68%. And survey respondents say the figure will be at nearly 75% five years from now.
As I alluded to earlier, however, the move among nations toward “onshoring” their gold didn’t begin this year or even three years ago. It’s true that sanctions against Russia have energized the trend with additional momentum. But countries with significant global heft – and cornerstones of the West, I might add – have sought for many years now to physically reclaim their gold and bring it home…including from other countries in the West with which they’re on good terms.
And some might consider their reasons for doing so to be especially revealing.
In 2013, Germany made headlines when it embarked on a journey to repatriate the gold it was storing in the U.S. and France. Initially, the Bundesbank – Germany’s central bank – was rather nonspecific in its reasons for wanting to reclaim their metals. Officials were quick to dismiss suggestions that any possible improprieties on the part of the foreign nations housing the gold played a role in the decision to repatriate.
“We have no doubts about the integrity of other central banks,” Carl-Ludwig Thiele, Bundesbank official, said at the time. “We’re not aware of any irregularities.”
And yet they moved forward. By 2017, the Bundesbank had repatriated nearly 750 metric tons of gold from New York and Paris, meaning roughly half the country’s metal was now safely ensconced in Frankfurt.
At the time, conspiracy theories abounded about exactly why Germany was so eager to repatriate. Among them was that Germany wanted the gold on hand in the event the Euro collapsed. Another theory said they wanted to reclaim the U.S. gold, in particular, because of concerns then-President Donald Trump might confiscate it.
The Bundesbank dismissed all of that, suggesting the real reason was simply “to build trust and confidence domestically.”
It seems they would get no argument from Polish central bank officials on that point. In 2019, Poland’s central bank repatriated 100 metric tons of gold from the Bank of England. In a statement similar to that expressed by the Bundesbank, Polish central bank Governor Adam Glapinski said at the time the repatriation was consummated in large part because, “Gold symbolizes the strength of the country.”
The central bank of the Netherlands provided a similar justification when it repatriated a significant portion of the nation’s gold from the U.S. in 2014, saying the move would have a “positive effect on public confidence.”
In 2021, Adam Glapinski underscored the “true believer” sentiment about gold that he seemed to imply in his earlier statement:
“Why does the central bank own gold?” he asked rhetorically. “Because it retains its value even if someone cuts off the supply to the global financial system.”
And it seems echoes of the sentiments expressed years ago by German and Polish central bankers about the overriding importance of maintaining possession of gold assets can be heard from central bankers today, as well – including among respondents to the Invesco survey at issue.
According to this year’s central-bank survey data from the World Gold Council and Invesco, there seems little question that governments and central banks have high regard for gold because of its potential efficacy as a portfolio-optimizing asset.
But it seems just as clear from the survey that it’s not enough to own gold in order to “build trust and confidence” among the citizenry, as the Bundesbank would say. To do that, you must possess it, as well, apparently.
Here’s one respondent to the Invesco survey put it:
Gold has played a crucial role during the last couple of years: We increased the exposure 8-10 years ago and had it held in London, using it for swaps and to enhance yields, but we’ve now transferred our gold reserves back to our own country to keep it safe – its role now is to be a safe-haven asset.
The last part of that statement is particularly resonant, in my opinion. What that anonymous central banker is saying is that there’s more to gold as a “safe-haven asset” than its potential as a portfolio diversifier – that gold cannot truly possess that “title” unless it is itself possessed within the borders of the country that owns it.
Rod Ringrow, Invesco’s head of official institutions, makes clear there’s no shortage of central banks that now feel having direct access and control over their gold assets is about as important as owning it at all.
“‘If it’s my gold, then I want it in my country’ [has] been the mantra we have seen in the last year or so,” Ringrow said.
Ringrow essentially reiterated the comments of the anonymous central banker, as well, about how those institutions want to own gold and where they want to store it.
In fact, added Ringrow, having control over the physical asset might even be more important than its potential investment agility.
“Up until this year, central banks were willing to buy or sell gold through ETFs and gold swaps,” he said. “This year it’s been much more physical gold and the desire to hold gold in country rather than overseas with other central banks.
I’ve always thought the warm affection that central banks have for gold – particularly over the last decade-plus – has been especially telling. They’re central banks, after all, charged with the responsibility of being the best stewards they can on behalf of their nations’ monetary systems. And it seems the asset to which so many of them turn to help keep those systems stable is gold.
There may be a lesson in there somewhere for individual savers – but savers will have to decide that for themselves. If some conclude there is such a lesson, however, perhaps they’ll find one, as well, in the importance central bankers now also seem to place on ensuring that the gold they own remains both physical and accessible.
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