Why is central bank gold buying at record highs?
Correction: Originally, the WGC reported that 2022 central bank gold buying was the second highest on record. On Feb. 7, the analysts amended their research, stating that 2022 central bank demand hit an all-time high. The article has been updated to reflect the corrected data.
(Kitco News) Central banks had their eyes on gold last year, purchasing 1,136 tonnes — the most on record, according to the World Gold Council (WGC). This also marked a more than 150% increase from last year.
The WGC's Gold Demand Trends report from Q4 revealed that central banks bought an additional 417 tonnes of gold, following Q3's massive purchase of 445 tonnes.
"Geopolitical uncertainty and high inflation were highlighted as key reasons for holding gold," the WGC said in a report published Tuesday.
Central banks are paying attention to gold because of how it performs during times of crisis and its role as a long-term store of value. "It's hardly surprising then that in a year scarred by geopolitical uncertainty and rampant inflation, central banks opted to continue adding gold to their coffers and at an accelerated pace," the report pointed out.
The last time there was so much gold buying by central banks, the U.S. dollar was still backed by gold.
"Central bank purchases are highlighting the fact that gold remains a very important asset in the monetary system. Even though gold is not backing currencies anymore, it is still being utilized. Why? Because it is a real asset," Juan Carlos Artigas, Global Head of Research at the World Gold Council, told Kitco News.
Most of the 1,136 tonnes total was once again "unreported," said the report. "Echoing Q3, data for the final quarter of the year was again a combination of reported purchases and a substantial estimate for unreported buying," the report highlighted.
Turkey was the biggest buyer in 2022
The Central Bank of Turkey bought the most gold out of all central banks in 2022 as it searched for protection against unchecked inflation. Turkey's official gold reserves rose by 148 tonnes to 542 tonnes, marking the highest level on record.
In the fall, Turkey's inflation accelerated to 85% before slowing to 64% in December. Turkey's central bank was one of the very few that cut rates in 2022, taking the key interest rate from 14% to 9%.
China was also the big highlight from last year, as the People's Bank of China (PBoC) resumed gold buying for the first time since 2019 by adding 62 tonnes in November and December and lifting its total gold reserves to over 2,000 tonnes for the first time.
"These announcements were significant given China's historic position as a large buyer of gold, having accumulated 1,448 tonnes between 2002 and 2019," the report added.
Countries in the Middle East also stepped up buying, with Egypt purchasing 47 tonnes, Qatar 35 tonnes, Iraq 34 tonnes, United Arab Emirates 25 tonnes, and Oman two tonnes.
In Central Asia, Uzbekistan added 34 tonnes to its gold reserves in 2022, followed by the Kyrgyz Republic with six tonnes and Tajikistan with four tonnes.
India bought 33 tonnes in 2022, which was 57% lower than the previous year. "Intervention in the FX market to support the rupee during the year caused a decline in FX reserves of US$70bn, which may have impacted the bank's gold buying. Its gold reserves now stand at 787t (8% of total reserves)," the WGC report noted.
Out of developed market central banks, Ireland was the only one that bought gold in 2022, adding three tonnes to its reserves in Q1.
Despite the strong interest in gold, there was some selling. Kazakhstan was the largest seller, reducing its gold holdings by 51 tonnes.
Germany sold four tonnes because of its ongoing coin-minting programme. Sri Lanka reduced its holdings by three tonnes, followed by Poland, the Philippines, and Mongolia, each selling two tonnes. Other sellers of at least one tonne were Bosnia and Herzegovina, Cambodia, and Bhutan.
Russia announced that would resume its gold purchases from domestic producers last year. But there was no update provided since the central bank sold three tonnes of gold in January of 2022.
Outlook for 2023
The WGC admitted that it would be hard to match last year's demand in 2023, given the historical size of the purchases.
"It is also reasonable to believe that central bank demand in 2023 may struggle to reach the level it did last year," the report said. "A slowing of growth in total reserves is likely to put pressure on some central banks, reducing their capacity to allocate to gold. We therefore think it likely that 2023 buying will be more moderate."
The WGC also noted that central bank demand is difficult to forecast because it is often policy-driven. It added that "lagged reporting by some central banks means that we need to apply a high degree of uncertainty to our expectations, predominantly to the upside."
For more insights from the WGC’s Gold Demand Trends report, click here.