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Nearly a quarter of central banks plan to buy more gold as divide between emerging and advanced economies grows, says WGC survey

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(Kitco News) Central banks remain very keen on boosting their gold reserves, with 24% saying they plan to buy more precious metal in the next 12 months, according to the World Gold Council's (WGC) 2023 Central Bank Gold Reserves Survey.

"Following a historical high level of central bank gold buying, gold continues to be viewed favourably by central banks as a reserve asset," said the survey that polled 59 central banks between February 7 and April 7.

Financial market concerns, planned purchases of domestic gold production, and portfolio rebalancing are driving the additional buying.

"These results come amidst a backdrop of ongoing geopolitical tensions as the war in Ukraine continues and the ensuing macroeconomic fallout of prolonged inflation and tighter monetary policy persists," the survey noted. "Adding to these concerns is the banking sector crisis in the United States and Europe which began in early 2023."

Central banks also like gold due to its historical position, performance in times of crisis, store of value, inflation hedge properties, and ongoing geopolitical and systemic financial risks.

"Gold's 'historical position' continues to be the top reason for central banks to hold gold, with 77% of respondents saying that it is highly relevant or somewhat relevant," the survey said. "This was followed by gold's performance during times of crisis' (74%), 'long-term store of value / inflation hedge' (74%), 'effective portfolio diversifier" (70%), and "no default risk" (68%)."

The divide between emerging vs. advanced central banks

Overall, the view on gold remains very optimistic, with 71% of respondents saying global central bank gold holdings would rise in the next twelve months compared to 61% last year.

But there is also a growing divide in how the emerging market and developing economies (EMDE) think about gold allocation versus the advanced economies, the survey pointed out.

When asked about gold's future share in global reserves, 68% of EMDE respondents saw gold's share rising compared to 38% of advanced economy respondents. A small proportion of EMDE central banks even said they saw gold's share of reserves rising above 25% - a major shift from last year's results, with zero respondents indicating that.

On top of that, EMDE central banks — the primary gold buyers since the 2008 global financial crisis — are also more pessimistic about the future of the U.S. dollar. Fifty-eight percent of EMDE respondents believe the U.S. dollar's share of global reserves will drop versus only 46% of advanced economy respondents stating that.

Also, only 20% of EMDE respondents said the U.S. dollar's share of global reserves will remain unchanged five years from now, compared to 54% of advanced economy respondents sharing this view.

"With other countries becoming more important on the global stage, investments in the U.S. will become slightly less than they are now. Increasing transparency and liquidity in those market economies will also contribute to this," the WGC cited 'select comments' from respondents. "The trend over the past few decades has been for countries to diversify their reserve holdings and reduce their dependence on the U.S. dollar. Many central banks have been actively diversifying their reserves by increasing their holdings of other currencies, such as the euro, yen, and Chinese yuan as well as gold."

EMDE countries see gold playing a strategic role amidst geopolitical uncertainty. "This divergence appears in nearly every factor for holding gold, underscoring the different economic and strategic circumstances faced by both groups, which further translate into their differing views on gold's role in their reserves," the survey noted.

'Concerns about sanctions' was added as a new response option for holding gold, and 25% of EMDE countries cited it versus 0% among advanced economies.

All EMDE central banks indicated an interest in establishing a domestic gold purchase program, the WGC added.

And the Bank of England remained the most popular storage location, with 53% of respondents storing gold there. "Domestic storage declined slightly with 35% of respondents citing it as the location of their gold, compared to 40% last year," the survey said.

Last year, central banks bought record amounts of gold, boosting reserves with an asset viewed as a safe haven during economic distress and an ongoing de-dollarization trend.

During the first quarter of this year, central banks added 228 tonnes to their global gold reserves, marking a record pace for the first three months of the year since data collection began in 2000, according to the World Gold Council (WGC).

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.