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Central banks have been actively and extensively purchasing gold over the past few years. In its report published this week, UBS highlighted the continued interest in gold by central banks, emphasizing its role as a hedge against inflation, a diversification tool during market stress, and a reliable asset in times of economic turmoil.
In the wake of the Ukraine war and the freezing of nearly $300 billion in Russian foreign holdings, central banks, especially those in smaller countries vulnerable to Western sanctions, have increased their gold reserves.
Although this trend does not directly affect the dollar-based status quo, it indicates a shift in the perception of central bank sovereignty and adds to calls for reform in the international financial system.
By the end of 2023, central banks’ gold reserves amounted to about 37 thousand metric tons, representing 16.7% of the total foreign exchange reserves of central banks. The largest reserves are held by developed countries, led by the United States, Germany, Italy, and France.
However, emerging markets are accumulating gold quickly, with notable increases in Russia and China, UBS strategists said.
These purchases are part of a broader move to diversify assets and reduce reliance on major currencies such as the US dollar, euro, Japanese yen and British pound.
An opinion poll conducted by the World Gold Council among reserve managers indicated that the long-term value of gold, its role as an inflation hedge, and the absence of counterparty risks are the main reasons for including it in reserves. Moreover, gold’s daily liquidity and absence of default risk are crucial in light of high public debt.
Inconsistencies in reporting on gold purchases between the IMF and other sources such as Metals Focus highlight the sensitive nature of reserve disclosures and the potential for incomplete reporting of gold acquisitions by sovereign wealth funds.
Historical patterns suggest that central bank actions can have a significant impact on gold prices. Compared to the mid-1960s, when central banks sold gold to maintain the gold standard, today’s market is much more liquid and diverse.
“Looking ahead, demand for gold is strongly supported by central banks,” UBS said. “An additional factor over the next few years could be our expectations of a weaker US dollar. Emerging market central banks tend to intervene in currency markets when… The value of their currencies rises against the US dollar.
“With emerging market central banks likely to increase their foreign exchange reserves as a result of currency market interventions, there may be a greater need to purchase more gold.”
UBS maintained its positive outlook on gold, citing demand from central banks, geopolitical tensions, rising inflation and potential lower US interest rates as supportive factors.
The Swiss brokerage firm expects gold prices to reach $2,600 per ounce by the end of the year and $2,700 per ounce by mid-2025, and recommends a 5% allocation to gold in a balanced US dollar-based portfolio for individual investors.
