Why Do Central Banks Keep Buying Gold?

  • Central Banks are gold’s leading proponents

  • The Dutch central bank explains why

  • Central bank buying provides support for the precious metal

The dollar is the world’s reserve currency. Meanwhile, gold is an asset that central banks around the world hold, but rarely talk about. The International Monetary Fund reports on central bank’s reserve holdings each month. The IMF classifies gold holdings as part of a nation’s foreign currency reserves.

Gold is a hybrid as it is part commodity and part currency. In its role as a reserve asset, gold continues to retain its position as the world’s oldest means of exchange. The yellow metal has been around a lot longer than any of the world’s currencies in circulation today. Gold has been a currency for thousands of years. There are no mentions of the dollar, euro, yen, pound, or any of the other currencies in the Bible, but gold and silver are prominently featured.

In many ways, gold acts as a barometer for the value of foreign exchange instruments. Since the early 2000s, the price action in the gold market has been telling us that all currencies have been losing value compared to the precious metal.  The SPDR Gold Shares ETF product (GLD) holds gold bars.

Central Banks are gold’s leading proponents

Throughout the history of the world, producers have extracted around 190,000 tons of gold from the crust of the earth. Central banks currently hold over 30,000 tons of the yellow metal with the US leading the world with holdings of over 8,000 tons.

Central banks, governments, monetary authorities rarely talk publicly about gold. The old saying that “silence is golden” could be the most appropriate comment when it comes to the official sector’s attitude towards the precious metal. Gold went through a period at the beginning of this century when it was out of fashion. Particularly with some of the world’s central bankers. The hub of the international gold market is in London, and the Bank of England has been a leading regulator when it comes to the trading of the yellow metal. From 1999 through 2001, the UK’s central bank sold one-half of its reserves. The sales were below the $300 per ounce level. At the time, the Bank of England and other central banks considered gold a relic of the past. However, at around six times higher than the price they sold; the official sector realized that there is no other asset quite like gold.

The Dutch central bank explains why

During October, one of the leading central banks broke its silence when it comes to its opinion of the gold market. The Dutch central bank, De Nederlandse Bank, said that gold was a critical asset. A report from the central bank said, “If the entire system collapses, the gold stock provides a collateral to start over. Gold gives confidence in the power of the central bank’s balance sheet. That gives a safe feeling.”

The Dutch central bank holds 612.5 metric tons of gold and is the world ninth leading holder of the yellow metal ahead of India and behind Japan. The Dutch comments on gold are particularly significant these days. The yellow metal recently made news highs against virtually all foreign currencies except for the Swiss franc and US dollar. Meanwhile, the precious metal also appreciated against the franc and greenback since June.

Central bank buying provides support for the precious metal

While central banks were net sellers of gold at the turn of this century at bargain-basement prices, today they are net buyers of the precious metal adding to reserves. According to the World Gold Council, a dozen central banks increased their gold holdings by at least one ton through the first eight months of 2019. Russia and China have been the leading buyers. Both nations are significant gold producers and have been accumulating domestic production. At the same time, Russia and China have also purchased gold on the international market to increase their reserves.

Gold is the ultimate hard currency. While governments can print fiat currencies to their heart’s content, production limits the supply of gold. The world’s central banks rarely talk about the precious metal. The recent comments by the Dutch provide a window into why gold is the ultimate store of value in the world and why the yellow metal should be an asset in all portfolios.

The SPDR Gold Shares (GLD) was trading at $140.76 per share on Wednesday morning, up $0.56 (+0.40%). Year-to-date, GLD has gained 13.84%, versus a 12.67% rise in the benchmark S&P 500 index during the same period.

GLD currently has an ETF Daily News SMART Grade of B (Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.

About the Author: Andrew Hecht

andrew-hechtAndrew Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories. Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup. Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.