Central bankers who manage trillions in foreign exchange reserves are loading up on gold as geopolitical tensions including the war in Ukraine force them to rethink their investment strategies.
An annual poll of 83 central banks, which manage a combined $7tn in foreign exchange assets, found that more than two-thirds of respondents thought their peers would increase their gold holdings in 2023.
Bullion tends to become more attractive in times of instability, and demand has soared over the past year. The amount of gold bought by central banks rose by 152 per cent year on year in 2022 to 1,136 tonnes, according to the World Gold Council, a trade body.
Most reserve managers surveyed rated geopolitical risk as one of their most important concerns — second only to high inflation — according to the HSBC Reserve Management Trends Survey published by Central Banking Publications.
More than 40 per cent of respondents listed it as one of their top risk factors, compared with 23 per cent in last year’s poll.
Around a third of those polled had changed, or were planning to change, the assets they purchase owing to tensions such as Russia’s invasion of Ukraine and worsening US-China relations.
Víctor Méndez-Barreira, author of the survey, said Russia’s full-scale invasion of Ukraine had created a “factor that reserve managers now need to reckon with”.
The invasion led the western alliance of the US, UK and EU to deploy extensive financial sanctions on Moscow, including measures to freeze around $300bn-worth of Russian central bank assets. The central bank’s gold reserves did not fall under the direct ambit of the sanctions as they were stockpiled in Russia.
World Gold Council figures show many purchases made over the past year have been by central banks in countries that are not aligned with the west.
The People’s Bank of China bought 62 tonnes of gold in November and December 2022, lifting its total bullion reserves above 2,000 tonnes for the first time. Turkey’s official gold reserves rose by 148 tonnes to 542 tonnes over 2022. States in the Middle East and Central Asia were also listed by the council as “active buyers” of gold last year.
John Reade, chief market strategist at the World Gold Council, said the sanctions against Russia’s central bank had “caused many non-aligned central banks to reconsider where they should hold their international reserves”.
He added: “Countries have recognised that the gold that Russia holds, because it’s outside of anybody else’s control, is useful in situations where you might not be able to access any other reserves.”
While Russia’s gold was stored at home, many central banks keep their reserves abroad, including at the Bank of England and the New York Federal Reserve, reflecting London and New York’s status as the biggest gold dealing markets.
Gold was also seen as an effective hedge against high inflation — the number one concern of more than 70 per cent of those polled. The price of bullion is now close to an all-time nominal high, following the surge in inflation over the course of 2022.
The majority of those polled said the renminbi would become a larger share of international reserves over the rest of this decade.
European Central Bank president Christine Lagarde warned in a speech last week that rifts between the US and China threatened the leading positions of the dollar and euro in global reserve management.
According to IMF data, the dollar accounted for 58 per cent of all central bank reserves during the fourth quarter of last year. The euro accounted for a little over 20 per cent, and the renminbi just 2.7 per cent.
The survey took place between February and mid-March 2023.
Additional reporting by Harry Dempsey
