Why are rich countries buying more gold?

Central banks in advanced economies expect gold’s share of global reserves to rise at the expense of the US dollar, as these institutions look to follow emerging markets in buying bullion, according to the Financial Times.

Nearly 60% of central banks in rich countries believe gold’s share of global reserves will rise in the next five years, compared to 38% of respondents last year, according to an annual survey by the World Gold Council, an industry group that promotes investment in gold.

Buying gold

About 13% of advanced economies plan to increase their gold holdings next year, up from about 8% last year, the highest level since the survey began.

This follows purchases by central banks in emerging markets, which have been the main buyers of gold since the global financial crisis in 2008.

At the same time, a growing proportion of advanced economies – 56%, up from 46% last year – also believe the dollar’s ​​share of global reserves will decline over the next five years.

Among emerging market central banks, 64% share this view.

The demand for gold, which comes despite a sharp rise in the yellow metal’s price this year, highlights the extent to which allocations to the dollar have declined as central banks seek to diversify their holdings into alternative currencies and assets, especially after the US used its currency as a weapon in its sanctions on Russia.

Gold and the Dollar

“We have seen a much stronger convergence this year,” said Shukai Fan, head of global central banks at the World Gold Council. “More advanced countries are saying gold will occupy more of the global reserves and the dollar will fall.”

“It’s not emerging markets that are weighing these factors less, it’s developed markets that are catching up with how emerging markets feel about gold,” he added.

The survey — one of the few insights into the thinking of publicity-shy reserve managers — found that a record 29% of central banks plan to increase their gold reserves over the next 12 months since the survey began five years ago.

Among emerging market respondents, about 40% plan to increase their holdings.

The main reasons central banks cited for holding gold were its long-term value, its performance during the crisis and its role as an effective source of diversification.

Central banks added more than 1,000 tonnes of gold to their reserves in 2022 and 2023, according to the World Gold Council.

Investing in Gold

US sanctions on Russian dollar-denominated assets have led non-Western official financial institutions to rush to buy bullion — whose value, unlike paper money, is not dependent on any government or bank.

Gold hit a record high of $2,450 an ounce last month.

The dollar’s ​​share of global foreign exchange reserves — excluding gold — has fallen from more than 70% in 2000 to about 55% last year, stripping out the impact of the U.S. dollar’s ​​appreciation, according to research by the International Monetary Fund this month.

Including gold, the dollar’s ​​share has fallen to less than half, the World Gold Council says.

While China’s renminbi has made some gains as a reserve currency, uncertainty over the country’s economy means the proportion of central banks expecting the renminbi to increase its share of global reserves has fallen from 79% last year to 59% this year.