Central Banks Buy Gold at Fastest Pace Since 1967

Central banks are accumulating gold at the fastest pace since 1967, with analysts noting that major buyers include China and Russia, indicating that some countries wish to diversify their reserves away from the dollar. Data compiled by the World Gold Council (WGC), an industry-funded group, showed that demand for this precious metal has exceeded any annual amount in the last 55 years, according to the Financial Times.

Estimated demand last month was also significantly higher than official reports of central bank purchases, prompting expected speculation in the industry about the identity of the buyers and their motives.

Hundreds of tons of gold purchased in just a few months

The surge in central bank purchases of gold ‘would suggest that the geopolitical backdrop is woven from distrust, suspicion, and uncertainty’ after the U.S. and its allies froze Russian dollar reserves, said Adrian Ash, head of research at BullionVault.

The last time this level of buying was seen marked a historic change for the global monetary system. In 1967, European central banks bought large quantities of gold from the U.S., leading to a price drop and the collapse of the London Gold Pool. This accelerated the eventual disappearance of the Bretton Woods system that tied the value of the dollar to the precious metal.

Last month, the WGC estimated that global official financial institutions purchased as much as 673 tons of gold. In just the third quarter, central banks bought nearly 400 tons of gold, the largest quarterly ‘frenzy’ since such reports began in 2000.

The WGC’s conservative estimate exceeds the officially reported purchases to the International Monetary Fund (IMF) and individual central banks, which total 333 tons in the nine months to September. Officially, purchases in the third quarter were led by Turkey with 31 tons, bringing gold to about 29 percent of total reserves. Uzbekistan followed with 26 tons, while in July, Qatar made the largest monthly gold purchase since 1967.

The difference between the WGC’s estimates and the officially reported figures tracked by the IMF can be partially explained by government agencies aside from central banks in Russia, China, and other countries that may buy and hold gold without reporting it as reserves.

China and Russia are major buyers

The People’s Bank of China (PBoC) announced this month that it increased its gold reserves in November from 2019, with 32 tons of the precious metal valued at around $1.8 billion. However, the industry says these amounts are almost certainly higher than reported, FT stated.

Mark Bristow, CEO of Barrick Gold, said that China likely purchased around 200 tons of gold based on conversations with several sources.

Nicky Shiels, a metals strategist at MKS PAMP, a precious metals trading company, added that the price of gold in November would have been about $75 lower had the PBoC only bought 32 tons. The price of gold traded up to $1,787 per ounce in November and has since risen above $1,800.

Sanctions have created significant problems for the gold mining industry in Russia (the largest in the world after China) in selling across borders. The country produces about 300 tons of gold each year but has a domestic market for only 50 tons, according to MKS PAMP.

At the same time, Western governments have frozen $300 billion of Russian foreign exchange reserves through sanctions.

Russian gold purchases resemble a scenario in South Africa during the apartheid-era sanctions, supporting domestic mining by purchasing gold using the local currency, Ash says.

The Central Bank of Russia has stopped publishing monthly figures on its reserves since the war began. CBR officials have dismissed suggestions that they are buying gold.

They do not want to be dependent on the U.S. dollar

However, CBR officials have long placed strategic value on increasing gold reserves; in 2006, they stated that it would be desirable for gold to make up 20-25 percent of their holdings, but in February 2022, the last time the CBR published its statistics, gold accounted for 20.9 percent. The bank has reduced its holdings to just $2 billion from over $150 billion in 2012, while increasing gold reserves by more than 1,350 tons worth nearly $80 billion at current prices, according to data from Swiss bank Julius Baer.

Carsten Menke, chief researcher at Julius Baer, believes that the purchases by Russia and China indicate a growing uncertainty among countries about relying on the U.S. dollar.

– The message that central banks are sending by putting a larger portion of their reserves into gold is that they do not want to be dependent on the U.S. dollar as the main reserve asset – said Menke.

Some in the industry believe that Middle Eastern governments are using revenues from fossil fuel exports to buy gold, most likely through sovereign wealth funds. The coming months will show whether the record purchases by central banks were an opportunity for cheaper gold or a larger structural change.