Central Banks' Gold Rush Intensifies

Gold is attracting growing interest in an international environment marked by multiple challenges and a climate of permanent uncertainty. Progressive de-globalization and contemporary societal aspirations also accentuate the importance of an independent asset, subject to no authority. Finally, while the new world is slow to emerge, it is mainly the central banks of the "Global South" that are buying gold. This is a clear sign of profound change, at a time when many powers are seeking to modify the international financial system. 

At the start of this year, central bank demand for gold remains very strong. In January, nearly 40 tons of gold were purchased, continuing the trend of recent months. In 2023, purchases continued at an extremely high rate with over 1,000 tons, approaching the 2022 level. Gold price has thus reached a new record high, both in dollars and euros. And this progression is all the more notable as interest rates are rising, which historically erodes gold's appeal due to its lack of yield.

A changing environment

In this context, China plays a leading role. Faced with the turmoil in the country's financial and real estate markets, marked in particular by instability in the regions, Xi Jinping's government has been increasing its gold reserves on a monthly basis for over a year. China is now the world's sixth largest holder of gold, although its total reserves are certainly higher than the official figures.

More generally, a change is taking place. Unlike in past decades, it is no longer the central banks of Western countries that are accumulating the most gold, but those of Eastern European countries, members of the "Global South". The top buyers in January were Turkey, China, India, Kazakhstan and Jordan. Although they hold lower reserves than developed economies, they are buying gold at a significantly higher rate. This is the sign of an historic movement: the tipping of the world and the rise to power of new countries on the international stage. Their desire to break with the hegemony of the dollar is also playing a major role, as the US budget deficit, exponential debt growth and international conflicts increasingly threaten the stability of the greenback.

A strategic move

These countries' attraction to gold is also symbolic of a loss of confidence in Western institutions and the unilateral rules they impose. For example, the use of the SWIFT network as an instrument of sanctions by the USA, whether on Iran in 2015 or Russia in 2022, has been a determining factor. To obtain gold, many monetary institutions hide the scale of their acquisitions from the IMF, or resort to other financial instruments. As a result, more than 50% of central bank transactions on the gold market are anonymous. 

Finally, these "Global South" countries are also major exporters of raw materials (especially critical raw materials), and therefore intimately aware that gold is also a real resource. Conversely, money remains a social convention that relies solely on the trust of its users. In a world where governments are faced with record levels of debt, and rising interest rates are making repayment more difficult, holding a tangible asset like gold is a key to stability, and therefore a major imperative. 

As a security that is independent of monetary policy and insensitive to credit or counterparty risks, gold is a form of insurance. Lenders and investors consider that countries which increase their gold reserves protect themselves against financial instability. A virtuous circle is created, enabling these countries to access foreign capital more easily and borrow at lower cost.

A new era?

Although central banks have been buying gold on a regular basis for several years now, the proportion they hold is much smaller than in the past. Today, 20% of their balance sheet assets are gold, compared with over 70% in the 1980s. As financial globalization and low-cost money eased international tensions, central banks reduced their gold reserves. During the financial crisis of 2007-2008 (the turning point that put an end to this illusion), gold represented just 10% of the reserves of monetary institutions. 

Since 2008, due to international conflicts and ongoing financial instability, their reserves have continued to grow. This trend is set to continue, with gold accounting for at least 40% of total reserves within the next few years.

Overall, several factors indicate that we are entering a new era for gold, quite different from previous ones:

• Demand is largely driven by public institutions such as central banks. And these purchases are being closely monitored by international investors.
• Gold breaks away from its historic link with the dollar.
• The de-dollarization of trade and reserves will continue to guide many countries.
• Political and economic instability will increase, particularly this year when major elections are taking place around the world, affecting 60% of global GDP.
• Inflation will persist in Western countries in particular, due to the historic level of global debt, demographic dynamics, rising shortages, the climate and digital transition, the return of protectionism and international conflicts. 

Inflation is also likely to stimulate consumer buying. Germany, in particular, appears to be one of the main countries concerned. In a country that has seen eight currencies in a century, and where the hyperinflation of the 1930s still haunts the memory of its citizens, gold appears as a protective asset. In the aftermath of the 2008 crisis, when bond yields were falling, Germans accumulated gold at unprecedented levels. Today, despite the rise in interest rates, inflation is weakening the real value of interest payments, providing a new incentive to buy gold in Germany and elsewhere. 

Finally, buying gold also reflects contemporary aspirations. At a time when interdependence between nations is diminishing as a result of de-globalization, and the re-establishment of borders is becoming a necessity in many countries, gold, by its very nature free from foreign authority, is synonymous with sovereignty. As for the individual, the growing need for freedom in societies that tend towards permanent surveillance is prompting many individuals to turn to this independent asset. Moreover, the introduction of central bank digital currencies will have a catalytic effect...