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Gold plays an important role in a country’s foreign reserves. As a result, central banks are significant holders of gold.
Gold is a unique commodity; with its duality as both a commodity and a monetary asset, it can act as a long store of value. The international gold market is deeply liquid, and it carries no counterparty risk, making it an ideal reserve asset for central banks to own.
Based on a study by the World Gold Council, the top four reasons central banks own gold are:
- Long term store of value
- Historical position
- Performance during times of crisis
- Effective portfolio diversifier
Notable heads of central banks have commented on the importance of increasing their gold position.
The De Nederlandsche Bank (DNB – Central bank of the Netherlands) said in 2021:
‘A bar of gold always keeps its value. Crisis or not. That gives a safe feeling. The gold holdings of a central bank are therefore a beacon of confidence.’
Similar sentiments were expressed by the National Bank of Poland, with Bank Governor Adam Glapinski stating the reasons for owning gold were clear:
‘Gold is characterised by a relatively low correlation with the main asset classes – especially the US dollar dominating the NBP reserve portfolio – which means that including gold in the reserves reduces the financial risk in the process of investing in them.’
Central banks hold 36,000 tonnes of gold
Central banks added 463 tonnes gold to their global reserves in 2021, an 82% increase on the 255 tonnes bought in 2020. Global central bank gold reserves are now just under 36,000 tonnes – the highest in 31 years.
While the US has the largest dollar value and tonnage position in gold (left), East Asia has the largest portion of their FX reserves in gold (right).
Source: Central Banks; Federal Reserve Bank of St. Louis; International Monetary Fund; World Bank; World Gold Council
Last year, central bank buying of gold provided price support for this precious metal.
During the first nine months, there were several large purchases from central banks, such as Thailand and Brazil, in addition to surprise acquisitions from more developed economies like Ireland and Singapore, both adding to their reserves for the time in 12 years and 20 years respectively.
Up until 2009, central banks often sold gold to increase their holdings in US dollar denominated assets like US Treasury securities.
This trend began to reverse the following year, with central banks being net buyers of gold since 2010.
Central banks are expected to continue to add to their gold reserves in 2022 though it is unlikely to be as large as 2021.
