Central banks rely on gold

As you know, 50 years ago, American President Richard Nixon withdrew the United States unilaterally from the Bretton Woods monetary system, which was created at the end of World War II. The first and irreversible step in this process was the decree of the American president on ending the convertibility of dollars into gold. After that, the yellow metal ceased to be the only form of reliable money, but, nevertheless, retained its attractiveness as an investment tool. Since then, central banks have been constantly buying yellow metal to replenish their gold reserves. Today, these financial institutions are the largest holders of precious metal. They constantly monitor course changes, managing a reliable reserve of their countries. The repositories of central banks at the end of July 2021 contain 35.5 thousand tons of yellow metal. This volume is 17.6% of the total amount of precious metal on the market. Central banks keep gold reserves physically. The practice of storing reserves in other countries is common, but its accounting is still kept as part of the international reserve of the owning country.

Gold - the main strategic reserve

In just over 10 years, central banks have become the main owners of gold. One of the reports of the World Gold Council indicates the reasons for the increased interest of the authorities in yellow metal. First of all, central banks save yellow metal to finance the country's needs during times of crisis and use it to protect national savings. Thus, gold still serves as the strategic reserve of the country, acting as a means of saving and as an instrument of hedging inflation.

Since 2010, central banks have stopped selling precious metals in large volumes. A little more than 10 years ago, financial regulators became net buyers of yellow metal.

From January 2010 to July 2021, central banks increased their gold reserves by 5.5 thousand tons of precious metal, raising them to 35.5 thousand tons. The United States is the world leader in the amount of gold in reserves - more than 8 thousand tons.

According to experts of the World Gold Council, one of the reasons for the cessation of sales of yellow metal by central banks was the financial crisis of 2008. The collapse of the global financial system made us think about the danger of debt burdens. Additional incentives to increase the gold reserve were the European debt crisis and a decrease in the US credit rating, which undermined investor confidence in the treasurer market.

Top gold buyers

The most active buyers of yellow metal since 2010 are the central banks of developing countries. In the years after the financial crisis, Russia, Turkey and Kazakhstan acquired the most precious metal. By the end of the last decade, purchases began to be made by central banks of other countries, even those that had not increased their gold reserve for many years. For example, in 2018-2019. the central banks of Poland and Hungary purchased more precious metal in general than all other financial regulators. Now they have become the main buyers of yellow metal. Even some European Union central banks have become net buyers again. The total reserves of the eurozone states for December 2020 amounted to 10.7 thousand tons, so the euro is the currency that is most provided by precious metal.

The COVID-19 pandemic forced the authorities to actively replenish their reserves to combat the crisis. Another important argument for such a policy is negative interest rates.