Central banks across the world are major buyers of gold apart from private investors and jewelry consumers. They are currently a major source of global gold demand. Between 1992 and 2022, central banks have moved from selling gold to become stockpilers of the commodity. In the 1990s and early 2000s, central banks were net sellers of gold, with an estimated sale of 4,426 tonnes (MT) between 2000 and 2009. Central banks were committed to selling the precious metal due to good macroeconomic conditions and a downward trend in gold prices. The strong economic growth made gold as a safe-haven investment less valuable due to low returns.
However, since 2010 central banks have become net buyers of gold. The 1997 Asian financial crisis and the 2007-08 global financial crisis were major drivers in this change of attitude by central banks. In 2022, amidst the global inflation and geopolitical tensions, global central banks purchased a record of 1,136 tonnes of gold worth $70 billion. Currently, global central banks hold about one-fifth of all gold mined amassing over $35,715 MT of the metal.
Central banks hold gold for several reasons. Gold is a proven safe-haven asset and investment that performs well in tumultuous economic times hence its ability to mitigate risk. Central banks also buy gold to balance foreign exchange reserves and to hedge against inflation and currency depreciation. Moreover, central banks hold gold to diversify portfolios to protect themselves from volatility since the price of gold rises when the U.S dollar falls in value.
Central Bank Gold Purchases in Early 2023
Gold demand by central banks is expected to go up this year as revealed in the mid-2022 survey by the World Gold Council (WGC) where 61 percent of the central banks participating in the survey expected global central bank gold reserve to rise and 25 percent hinted on plans to increase their gold reserves.
For the early months of 2023, central banks have not relented on their momentum in gold purchases according to the WGC. Central bank gold demand for the early part of this year has been the strongest start to a year since 2010. For the first two months of this year, it is reported that central banks accumulated net purchases of 125 MT of gold making it the highest amount for the year-to-date period since central banks became net buyers in 2010. Countries that recorded the largest purchases in the first two months of the year were Singapore (51.4 MT), Turkey (45.5 MT), China (39.8 MT), Russia (31.1 MT) and India (2.8 MT).
An interesting observation is the gradual increase in gold reserves of some BRICS (Brazil, Russia, India, China and South Africa) countries—China, Russia and India. Since 2010, Russia, China, India and Turkey account for the bulk of central bank gold purchases. According to gold market analyst Frank Holmes, gold is crucial in the dedollarization agenda of these countries, hence stockpiling the commodity. According to him “the BRICS need the precious metal to support their currencies and shift away from the U.S. dollar, which has served as the global foreign reserve currency for about a century”. This development would be beneficial to the price of gold if the dollar is devalued.
Central Bank Gold net purchases/Sales (Jan and February)
Chart Source: World Gold Council
Top 10 Central Banks with Largest Gold Reserves
Based on WGC’s data on gold reserves of central banks as at 31 March 2023, the United States tops as the largest holder of gold with 8,133.46 MT followed by Germany with 3,354.89 MT. Italy comes third with 2,451.84 MT followed by France in fourth position holding 2,436.81 MT of gold.
Russia, China (both members of BRICS) and Switzerland are fifth, sixth and seventh on the list with 2,326.52 MT, 2,068.36 MT and 1,040 MT respectively.
With below 1,000 MT, Japan, India and Netherlands occupy eighth, ninth and tenth positions with 845.97 MT, 794.62 MT and 612.45 MT respectively.
Africa’s Central Bank Gold Holdings
Central banks in Africa account for less of the global central bank gold reserves. According to the available data from WGC, Algeria has the most gold reserve with 173.56 MT followed by Egypt (125.63 MT), South Africa (125.38 MT) and Libya (116.64 MT). Central banks in countries such as Morocco, Nigeria, Ghana, Tunisia, Mozambique and Mauritania hold less than 25 MT of gold.
For the case of Ghana, the governor of the Bank of Ghana (BoG), Dr. Ernest Addison in a recent engagement with the press announced an increase in the bank’s gold reserve from the previous 8.74 MT to about 14MT. This he attributed to the domestic gold purchase programme, an intervention that provides the BoG the opportunity to buy locally produced gold from selected domestic gold aggregators and mining companies paying with the local currency at the prevailing market price.
The objective of the programme is to increase the country’s foreign exchange reserves, enhance the stability of the local currency, create a favourable environment for foreign direct investments and to enable the BoG use its gold holdings to raise cheaper sources of financing to provide short-term foreign exchange liquidity.