In June, central banks around the globe bought a total of 59 tonnes of gold to add to their vaults. In June, there were no central bank sales as governments hung onto the gold they already own. June marked the third consecutive month in which central banks bought ever larger amounts of gold to add to their coffers.
Why do central banks buy gold? The same reason that you do. Central banks buy gold for a number of reasons including:
1. Gold has no counter-party risk. There is no bank, brokerage, government (in the case of bonds) that is on the other side of your trade. Owning gold gives central banks and you true ownership of a physical tangible asset that can be exchanged for paper currency in any country in the world. You never have to worry that a bankruptcy or default will cause your gold’s worth to go to zero – unlike a stock, or even a bond.
2. Gold offers diversification away from paper currencies. Central banks also own lots of paper currency – like U.S. dollars, the euro, the Chinese yuan and other fiat currency. However, owning physical gold offers central banks diversification and protection against fluctuations, devaluations and even default in paper currency. Unlike paper currency, governments can’t affect the value of gold through printing presses.
3. Gold is a store of value. History has proven that gold is a vehicle to preserve and protect wealth. It is also an inflation hedge, which allows central banks and individual investors to protect their wealth when inflation erodes the value of your paper currency.
4. Gold performs well during crises. Gold historically rises in price – usually a lot – during geopolitical or economic crises. It helps protect portfolio losses in times of market stress as it acts as a high-quality and tail risk hedge. Central banks are looking to protect their country’s wealth, just like you seeks to protect your own.
5. Gold ownership helps central banks manage risk more effectively. Gold ownership helps manage risk and volatility, through diversification. Gold has a low correlation to key asset classes including its low correlation to stocks, especially during times of heightened equity market stress.
Who’s been buying gold this year?
Turkey was the largest gold buyer in the first half of the year, adding 63t to its gold reserves, according to the World Gold Council. Egypt was the second largest buyer in the first half of 2022, with a whopping a 44t (+54%) increase in March. The country now holds 125t of gold, or 21% of total reserves, the World Gold Council said. Other major gold buyers this year included the Central Bank of Iraq India, Ireland and Ecuador.
If central banks are still buying gold, it could make you wonder, do you own enough?
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