We talk a lot about the record-breaking central bank gold purchases happening this year, but not how these transactions happen. Who’s buying all this gold, who’s selling it, and why? Central bank gold demand has offered critical support to the precious metal market this year, so let’s dive into what’s going on behind the scenes.
We know a few of the top gold buyers dominating the market for the last few months have been China, Turkey, India, and Singapore. These nations, and other central banks buying gold, typically first look to make purchases Over the Counter (OTC). Central banks can purchase gold from wholesalers directly offering large-volume sales.
Wholesalers providing gold in tons are typically bullion banks. With gold costing over $1,900 per ounce, a one-ton purchase would come at the hefty price of at least $50 million, never mind banks like Singapore purchasing over 68 tons in the first quarter of the year. Not many bullion banks can handle these types of bulk purchases or funds, so the options are relatively limited.
A few of the top gold sellers to central banks (currently and formerly) include BNP Paribas, Credit Suisse, Goldman Sachs, Citibank, JP Morgan Chase, Morgan Stanley, Standard Chartered Bank, ICBC Standard Bank, HSBC, TD Bank, Merrill Lynch, and UBS. The leading seller on this list is JP Morgan Chase.
Aside from buying from bullion banks, central banks have a few other options. First, they can purchase gold directly through major refiners like MKS PAMP.
Nations may also build their reserves using the Bank of International Settlements (BIS) located in Switzerland. Another cost-effective choice would be purchasing from locally sourced providers, though this only works for gold-producing nations like the Phillippines, Russia, Mongolia, and China.
The final way central banks can buy gold is from other central banks. From time to time, nations off-load their reserves, selling to other central banks. For example, in 2009, the Internation Monetary Fund sold 200 tons of gold to India’s Central Bank, marking one of the last significant moments where gold would sit below the $1,000-per-ounce line.
Regardless of where they buy gold, central banks typically purchase Good Delivery Bars, administered by the London Bullion Market Association with a minimum 95.5% purity. Most bars weigh between 350 and 430 troy ounces, offering the most cost-effective purchase option.
So, which nations have been buying gold, how much, and why?
Central banks have now maintained a 13-year streak of net gold purchases, with 2022 marking a record-breaking year. Last year’s figures showed purchase totals higher than they’ve been since the 1950s. After this peak, many analysts expected to see a lull in buying attitudes this year, though 2023 has already begun to set its own records.
The first quarter of the year marked the highest first-quarter purchase figure of any year on record. Central banks purchased 228.4 tons in Q1 2023, which is 76% above the figure from the first quarter of 2022. The previous first-quarter record set in 2013 was just 170.4 tons, 34% below this year’s figure.
So far, this year’s biggest gold buyers include Singapore, China, Turkey, India, and the Czech Republic, in that order. Following the first quarter, Poland began adding significant purchases to its reserves for the first time in years, with mentions of stockpiling as much as 100 tons soon. By the end of the year, we may see Poland join our list of top buyers.
Central banks are buying this much gold because of the precious metal’s ability to perform amid times of crisis. Gold’s ability to store long-term value allows it to act as an inflation hedge, providing a much-needed tool given the rampant inflation rates this year. Given 2023’s tightening geopolitical climate, climbing inflation rates, recession fears, banking crisis, and de-dollarization trends, it only makes sense that nations are seeking a safer, more secure option over the U.S. dollar, which continues to lose value by the minute.
Many nations seem to agree on the concept of weaponizing the U.S. dollar. In its place, central banks have filled their reserves with gold and other foreign currencies, like the Chinese yuan.
The U.S. dollar continues losing its fame as nations are cut off from the global banking system or fear they may be in the future. To protect their wealth, central banks continue switching to an insurance policy of gold.
“Gold as wealth insurance is simply a store of purchasing power, with high liquidity, for a potential financial crisis you hope to never have,” Rich Checkan, the President and Alternative Asset Strategist at Asset Strategies International, Inc., explains.
