Central banks purchased more gold in 2022 than in the last 55 years. Recent data from the World Gold Council showed that central banks around the globe bought 673 metric tons of gold in the first three quarters of 2022 and just under 400 tons in the third quarter alone. The figures from 2022 surpass every annual total since 1967.
Various factors contribute to this global gold-buying frenzy. To start, the largest percentage of reserves in many central banks are U.S. dollars in the form of Treasury bonds. As the U.S. dollar suffers increasingly high inflation rates impacting its value, it only makes sense for more nations, like China, to reduce their dependence on the U.S. currency.
The People’s Bank of China relies on the nation’s large foreign exchange reserves for stability. While the hefty $3.1 trillion reserves may have provided critical stability in 2022, such funds may become crippling with the predicted wave of monetary devaluation coming in the next decade.
The idea of central banks adopting digital currencies could alter how the concept of money works. Following this method, central banks would transfer digital currency directly into individual bank accounts, creating full information access while eliminating banking and credit channels that lead to inflation increases. The passing of monetary policies slowed by credit demands keeps inflation at bay, though spikes the price of financial assets.
If central banks take this step toward digital currencies, gold’s status as a safe haven in the unsteady environment controlled by purchasing power destruction would be unrivaled.
Another argument for gold is liquidity. As banks prepare for upcoming monetary devastation, gold is one of the few financial assets still on the rise across the board in euros, yen, pounds, and other currencies.
According to Politico, the U.S. Federal Reserve, the European Central Bank, the Bank of England, the Australian Central Bank, and the Swiss National Bank “now face potential losses of more than $1 trillion collectively, as once-profitable bonds turn into liabilities.” By the end of 2022’s second quarter, the Federal Reserve lost $720 billion, and the Bank of England lost $241 billion.
When central banks experience such losses, they have a few options. They can use extra resources from previous years or request help from other nations. Central banks may also ask the government for support, meaning the taxpayers would be on the hook for fulfilling the gap.
Global debt across multiple major central banks creates waves of monetary deconstruction. As central banks experience enormous losses, more grasp the true power of gold’s security during such downward spirals. These organizations realize that governments won’t cut deficit spending any time soon, so they need to get ahead now before it’s too late.
A recent spike in quantitative easing only amplifies these issues. Without understanding the actuality of such issuer-debt complications, central banks began purchasing sovereign bonds rather than low-risk assets at safe prices. Now, as they begin seeing the losses pile up, central banks turn back to gold.
Gold helps central banks increase their reserves and reduce losses. It’s an age-old saying: you cannot just print more money. The challenge central banks face is juggling price inflation, consumer prices, and government deficits.
Central banks want to reduce inflation, but their assets keep losing value. Buying sovereign bonds and increasing the balance sheet with other quick buys is a liquidity trap. Central banks have no choice but to buy gold to shrink their balance sheets without suffering monetary demolition from their own policies.
A crippling economy may actually be positive news for investors in the precious metals market. As central banks like Turkey purchase 31 tons of gold in just one quarter, demand skyrockets, and so do prices. With banks around the globe suffering enormous financial losses and flocking toward gold as a safe haven, the precious metal market should see substantial growth in the next year and decade.
According to surveys from the London Bullion Market Association, analysts expect gold to increase by 3.3% by the end of 2023, showing price increases from $1,800 to $1,859. The number one explanation behind these predictions is a lack of trust in the U.S. dollar, specifically due to Federal Reserve actions. The more central banks tank, the more gold succeeds.
While gold may not offer immediate price jumps like cryptocurrencies, it provides monetary security over long periods of economic uncertainty amidst high inflation rates. As always, investors should consult their financial advisors before making any portfolio decisions.