Throughout the 1990s and the early part of the last decade, the world’s central banks were big sellers of gold. Many of the leaders and so-called economic experts who ran these central monetary authorities looked at gold as a “barbarous relic.” They quite wrongly saw the yellow metal as merely an ornament or a tradition.
Now, central banks have reversed direction. 2016 will likely mark the 7th straight year in which these institutions are net buyers of gold bullion.
Nonetheless, in order to help keep prices down, most of the banks still use rhetoric to denigrate gold. All the while they keep stacking up more and more gold reserves!
Diversification, Safe Haven
The global financial turmoil that has yet to clear up since the financial crisis is one big factor that has encouraged banks to pile up more gold. During that period, the banking system and equities markets came to the brink of utter collapse; at the same time, gold prices surged to all-time highs. It makes sense that central banks are stocking up on bullion after what they experienced during the crisis. They are holding gold as a hedge or safe haven against the risk that something similar ever happens—and most people are wisely not convinced it won’t again in the near future.
It’s not simply that central banks need a safe haven like everyone else. They need this on a large scale due to the mind-boggling amount of paper assets they hold and are exposed to, which amount to the trillions. Especially with the use of aggressive stimulus measures like QE, central banks’ balance sheets have ballooned, requiring much more of the precious metal allocated to effectively diversify their reserves.
As the chart below shows, central banks were net sellers of thousands of metric tonnes of gold throughout the preceding two decades, with more than 600 tonnes of net outflows from their reserves during certain years.
By contrast, 2015 saw central banks make net gold purchases of 483 tonnes, the second-largest total (behind the 544 net tonnes added in 2012) since the end of the gold standard in 1971. (This event is sometimes distinguished as the “closing of the gold window” since the dollar had previously been backed by, and therefore theoretically redeemable for, gold. However, gold itself was not used as currency like it was before 1933, known as a gold specie standard.)
Russia and China were the two largest purchasers most of the last six years in terms of adding to their reserves. The bear market for precious metals prices allowed these central banks to accelerate their purchases, as well. Only a few outliers chose to sell their gold, such as Canada. A handful of struggling Latin American countries like Mexico, Colombia, El Salvador, and especially Venezuela were forced to sell off gold reserves to counteract currency devaluation, but these were noteworthy exceptions rather than the rule.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.