Why Central Bank Gold Purchases Are at a Six-Year High

Central banks purchased more gold in the first quarter of 2019 than any other first quarter in the last six years. In fact, purchasing was so strong that reserves increased by 68 percent compared to Q1 of 2018. Moreover, this recent surge is part of a larger trend. Consider that in 2018 central banks purchased the second largest annual amount of gold on record. This total reached 651 metric tons outpacing 2017 by more than 70 percent.

What drove the $27.7 billion in central bank gold purchases last year, and what is keeping the trend alive in 2019?

Many have focused on Russia in their attempts to understand the run up in purchases. Reports have noted that “the Russian central bank sold almost all of its U.S. Treasury stock to buy 274.3 tons of gold in 2018.” This strategy represents their decisive move away from the U.S. dollar to gold, an asset often considered to be a safe haven in times of economic turmoil. Though the U.S. economy is in entering the 11th year of expansion making it the longest in history, some fear that problems lay ahead. The trade war threatens future growth and as analysts at J.P. Morgan Chase remarked, “in absolute terms, the nation’s debts are at an all-time high.” This heightened debt is mirrored on the consumer side of the economy as well. The same report shows that delinquency rates on auto loans presents a troubling picture. The segment of borrowers who have fallen behind by a minimum of one payment is now at its highest level in ten years.

Figures like these are leading many to question how long this historic economic expansion can run. The groundswell of support for gold among central banks seems to indicate these concerns are also shared by international governments. To examine central bank motivations more in depth the World Gold Council surveyed 22 central banks at the end of 2018. They learned that gold’s feature as a safe haven asset was the most significant reason for their purchases. The next three reasons for their purchases, in descending order of importance were, “effective portfolio diversifier,” “universally accepted,” and “historical position.”

What makes these reasons so compelling is the fact that they also represent the key reasons why most individual investors purchase gold. Just as central banks choose to buy gold as part of their long-term strategy, investors should similarly consider how this universal currency will diversify their portfolio, as a safe haven asset.

The key takeaway for investors is that central banks around the globe are united in their opinion that increasing their gold reserves is a good strategy. This trend is even more important when viewed in the context of an increasingly global economy in which one nation’s actions have an impact on another. Put simply, the decision by one central bank to increase their gold holdings is a key reason in itself for another country to follow suit. Investors can take cues from this global trend and evaluate how gold might be a smart long-term move for themselves.