(Photo: From left to right) Terrence Keeley, CEO at Impact Evaluation Lab; Marek Sestak, Deputy Executive Director of the Risk Management Department at the Czech National Bank; Enkhjin Atarbaatar, Director General of the Financial Markets Department at the Central Bank of Mongolia; and Joaquín Tapia, Director of International Reserves at Banco de México.(Kitco News) - While central bank demand has slowed in recent months compared to the record purchases reported in the first half of the year, this sector will continue to have an appetite for the precious metal, according to a panel discussion at the London Bullion Market Association (LBMA).
In a panel discussion at the 2024 LBMA Precious Metals Conference, Enkhjin Atarbaatar, Director General of the Financial Markets Department at the Central Bank of Mongolia; Marek Sestak, Deputy Executive Director of the Risk Management Department at the Czech National Bank; and Joaquín Tapia, Director of International Reserves at Banco de México, agreed that gold’s role as a reserve asset in global foreign reserves will continue to grow, even though each central bank views the precious metal differently within its portfolio.
The Czech National Bank, the most aggressive of the three, has been on an 18-month shopping spree, buying a total of 32.8 tonnes of gold since March. The central bank now holds 44.8 tonnes of gold, representing 2.4% of its total reserves.
Sestak reiterated Central Bank Governor Ales Michl’s plan to increase the nation’s official gold holdings to 100 tonnes. He also noted that the bank holds some mining stocks as part of its equity portfolio, increasing its exposure to gold without affecting official reserves.
The Bank of Mongolia is also fairly active in the gold market, increasing its official holdings. However, as a gold-producing nation, it also sells part of its domestic production. According to World Gold Council data, the BoM holds 4.9 tonnes of gold, representing 8.7% of its official reserves.
So far this year, the central bank has increased its official reserves by 2.4 tonnes and sold 3.5 tonnes.
During the discussion, Atarbaatar emphasized that gold is an important diversifier within Mongolia’s central bank portfolio.
“I think in the future, our reserves will increase,” he said.
Atarbaatar added that there is potential for the nation to use profits from its Sovereign Wealth Fund to buy more gold.
In North America, Banco de México has purchased 0.5 tonnes of gold so far this year. However, most of the central bank’s gold was acquired in 2011. It currently holds 120.4 tonnes, representing 4.2% of its official foreign reserves.
Tapia said that the bank values gold as a diversification tool due to its low correlation with other asset classes and currencies. He added that Mexico has been active in the gold market by using derivatives to hedge its holdings.
According to Tapia, falling interest rates and geopolitical uncertainty are two factors that give gold potential for further price gains.
“Going forward, it could make sense to increase our exposure to gold based on the geopolitical uncertainty,” he said.
The panel also discussed the growing attractiveness of gold as a global currency as nations seek alternatives to the U.S. dollar.
Sestak acknowledged that although the U.S. dollar will remain a key reserve currency, the global economy is gradually evolving into a bipolar world, which will support gold demand.
Atarbaatar noted that Mongolia currently holds 80% of its reserves in U.S. dollar assets. However, sanctions against Russia, following its invasion of Ukraine, have limited Mongolia’s ability to use those reserves.
He explained that because Mongolia is landlocked, it sources all its oil from Russia, with trade conducted in Chinese yuan.
“We can’t use the U.S. dollar,” he said. “If you can’t use it, what value does it really have?”
Atarbaatar also warned of the growing risk of second-round sanctions. Some Chinese banks have had to stop dealings with Russia to avoid losing access to broader global markets, making it difficult for Mongolia to transact in yuan.
Given these challenges, Atarbaatar suggested that, in a hypothetical scenario, central banks might use gold to settle international trade.
While gold’s role as a global currency is on the rise, the central banks also acknowledged challenges in the market.
Tapia pointed out that although gold is a liquid asset, the market is still too small to meet the demands of the global economy. As a result, Banco de México still prefers U.S. Treasuries for liquidity purposes.
Atarbaatar added that Mongolia does not view its gold as a liquidity tool. Instead, the central bank primarily holds gold for diversification purposes.
