Central-banks-double-down-on-gold-bars

Few assets captivate and confound like gold. While stocks and bonds rise and fall with economic trends, gold remains a rare constant - retaining its purchasing power across millennia.

In this piece, you’ll discover how much bullion monetary authorities aim to hold, which nations lead the pack in purchases, and the channels supplying thousands of tons annually.

How Much Gold Central Banks Are Buying

Over the last decade, a core group of central banks, mainly Russia, China, India, Turkey, Kazakhstan, and others, has led the charge in buying gold.

China has hinted it may eventually hold over 8,800 tons of gold bars in its official coffers, making it the second-largest gold-holding nation behind the United States. According to reporting by Metals Focus for the World Gold Council, the People’s Bank of China accumulated 62 tons of gold bars in 2022.

Russia added a massive 275 tons during 2022, which some experts dubbed a “gold buying spree” while under sanctions. The substantial Russian purchases accounted for nearly half of all central bank demand during 2022.

The country has publicly sought to undermine the dollar’s dominance and maintain its domestic currency with gold bars and other reserve assets, such as the Chinese yuan.

India bought about 40 tons of gold bars and Turkey expanded reserves by 126 tons in 2022 as well. The World Gold Council reports Kazakhstan purchased over 64 tons last year as former Soviet nations also seek alternatives to dollars and euros for reserves.

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The National Bank of Kazakhstan stated that it aims to hold about half its foreign exchange reserves in gold in the future to strengthen economic security.

According to the latest data, the ten largest holders of official gold are the United States, Germany, the IMF, Italy, France, Russia, mainland China, Switzerland, Japan, and India.

The US holds over 8,000 tons, while Germany owns 3,362 tons, the IMF 2,814 tons, Italy 2,451 tons, France 2,436 tons, Russia 2,298 tons, China over 2,000 tons, Switzerland 1,040 tons, Japan 765 tons, and India 773 tons.

Higher oil and gas revenues have supported Russia, Kazakhstan, and other countries purchasing substantial gold bars and quickly growing reserves in recent years.

Expect the gold buying spree from this section of the world to continue if current geopolitical and dollar uncertainty persists.

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Effects of Rising Central Bank Gold Demand

Higher gold reserve accumulation by central banks can impact several areas across financial markets, including:

Gold Prices

The obvious first area more central bank gold purchases influence is the overall demand for the metal, which directly feeds into price moves.

Central banks’ buying spree boosts incremental demand by hundreds of tons annually compared to past decades. This mounting need for physical bullion exerts upward pressure on gold pricing globally, especially during years of high buying like 2022.

Gold Mining Shares

Higher gold prices driven by strong central bank purchases also lift the profit potential for gold mining companies. Many gold mining firms become more profitable with each $100/oz rise in the gold price.

This feeds positively into the earnings picture, dividends, cash flows, and overall investment appeal of gold mining shares.

Central Bank Balance Sheets

Large gold purchases also affect the composition of central bank balance sheets, altering reserve composition often substantially over shorter timeframes.

Exchanging currency for gold bars impacts reserve asset mixes, sometimes significantly, where substantial purchases occur by a single nation. The changing face of reserves also impacts currency policies over time.

Currency Stability

Some economists argue that higher gold reserves boost confidence in domestic currencies, lowering inflation expectations and stabilizing fiat money.

Citizens in many countries remain partial to gold-backed currencies as well. This “confidence effect” often motivates developing nations to increase their gold reserve holdings. If gold reserves reach adequate levels, the result can be more stable national currencies.

Trade Balances

Increased gold accumulation in large surplus nations like Russia and China may ultimately signal plans to transact more commerce in bullion.

Settling trade imbalances via barter deals or using gold to pay for imports is often featured in the long-range strategic visions of several gold-buying countries. This could affect trade flows and offset reliance on dollar usage over forthcoming decades.

The scale of central bank purchases also demands scrutiny regarding how monetary authorities source adequate gold supply.

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Where Does Central Bank Gold Come From?

With central banks accelerating gold bar reserve purchases in recent years, the heaviest volume of new supply stems from gold mining activity. Demand from central banks and other areas requires larger gold mining output.

According to the World Gold Council, annual gold mine production totalled 3,578 tons in 2022, an increase over the prior year and not far from the record output.

Global gold mining levels have risen substantially since the early 2000s as higher gold prices incentivize more exploration and production. The world’s largest gold mines now produce between 500,000 and 1,000,000 troy ounces yearly (15 to 30 tons).

Major gold miners like Newmont, Barrick Gold, AngloGold Ashanti, Gold Fields, and Kinross have recently invested heavily in new projects and mine expansions. Peak production levels will likely remain for 5 to 10 years as lengthy mine lifecycles (often 20 to 40+ years) dictate slow supply growth.

Many experts forecast global gold mine output will reach as high as 4,500 tons per annum by 2030 if prices stay elevated and exploratory activity remains robust.

In addition to newly mined metal, central banks have potential sources of extra supply if needed from gold investors and the public.

Strategies like buyback programs or gold certificate issuance allow central banks to accumulate domestic gold holdings by purchasing metal from the local citizenry.

Jewellery recycling also generates an annual supply that central banks can tap into via local precious metal refineries and processors. By one estimate, recycled gold provides over 1,000 tons of annual supply globally.

Finally, if push came to shove, central banks could source extra gold bars on the open market internationally via transactions with dealers or other central bank counterparts.

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Conclusion: Gold Demand Rising from Both Public and Official Buyers

Central banks aim to diversify away from dollars and euros into gold over the long run. The motivations range from currency stabilization to inflation hedging and geopolitical preparedness.

With global gold prices rising during peak official sector buying intervals but generally positive long-term supply fundamentals still intact, investors can feel confident building precious metals positions.

Gold mining equities deserve portfolio attention as rising bullion prices augment free cash flows and shareholder returns.

Since central banks aim to buy more bullion for years to come, betting on gold early appears a prudently conservative move for buyers across the risk spectrum.

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