Central banks have been loading up on gold since 2020, and for a lot of, the buying sprees are a results of governments’ economic stimulus plans through the pandemic, which caused record-breaking inflation in subsequent years.
Still, with inflation having returned to historical norms in most countries, central banks have continued to build up gold at the same time as inflation has subsided, monetary policies have been adjusted and rates of interest have gotten lower.
So should investors follow the lead of those institutions and go on their very own gold-buying sprees? This evaluation will reveal why central banks are buying a lot gold, the advantages of shopping for gold straight away, and what to think about before accumulating the dear metal.
Revisiting the gold standard
It’s not latest for central banks to hoard gold. Actually, the gold standard directly tied the U.S. dollar to gold for many years. The gold standard was axed in 1931 by Great Britain, with the U.S. following suit in 1933.
Inflation was still present and quite volatile through the period when the gold standard was in practice, nevertheless it averaged out ultimately. Between 1880 and 1914, inflation only averaged 0.1%. That period coincided with America’s “classical gold standard,” however the country had mid-single-digit inflation and deflation rates in a few of those years.
Nevertheless, inflation has grown at a faster pace for the reason that U.S. moved away from the gold standard. This has been reflective of historical trends, with multiple countries and empires throughout history experiencing soaring inflation after debasing their currency from gold and counting on fiat currency as a substitute.
It’s vital to recollect the gold standard when the present gold-buying spree that’s happening. Central banks can pump out more dollars, decreasing the worth of their paper currency in the method. Since gold has intrinsic value, its price will increase relative to the currencies that central banks proceed to flood into the monetary system.
How much gold are the central banks buying?
Central banks bought a record 1,082 metric tons of gold in 2022. Those institutions also gathered 1,037 metric tons of gold in 2023. And in 2024, central banks are currently on the right track to interrupt the record set in 2022.
Central banks gathered 299.94 metric tons of gold in the primary quarter of 2024, setting a record for Q1 gold purchases. An extra 183.39 metric tons of gold arrived within the second quarter, representing the best Q2 total since 2021.
Within the third quarter of 2024, central banks bought 186.2 metric tons of gold, which represents a steep year-over-year decline from Q3 2023 gold purchases. Nevertheless, the physical asset’s demand has greater than doubled year-over-year, based on the World Gold Council.
Why are central banks buying gold?
Central banks recurrently gathered gold before the pandemic, however the ramp-up in recent times has been noteworthy. There are some explanation why these institutions have been stockpiling precious metals, including those listed below.
Rising inflation
Fiat currencies lose value as governments print more cash. While inflation has been the norm, the U.S. printed greater than $3 trillion in 2020, with other countries also putting their money printers to work.
Higher inflation reduces the purchasing power of fiat currencies. Consumers saw that firsthand as the associated fee of all the things increased in 2022. In accordance with the U.S. Labor Department, the annual inflation rate hit 7% in 2021 and 6.5% in 2022.
Falling rates of interest and tariffs could fuel inflation
The speed of inflation has subsided since its peak of 9.1% in June 2022. The newest Consumer Price Index print in October was 2.6%, which aligns with the pre-pandemic average. Nevertheless, inflation can inch higher because the Federal Reserve continues to chop rates, having enacted two cuts already this fall and one other cut likely during its December FOMC meeting.
Lower rates of interest encourage more consumers and businesses to borrow capital. Loans and contours of credit increase the circulation of cash, which results in more inflation.
While we’re not more likely to see inflation challenge the highs set in 2022, inflation could rise as rates of interest proceed to fall. Moreover, President-elect Trump’s proposed tariffs are expected to extend inflation within the short run, which could lead on to higher gold prices.
Any potential federal income tax cuts may find a way to compensate for the additional costs related to tariffs, but reductions in federal income taxes would also increase inflation by putting more cash into the economy.
Global uncertainty
Global conflicts have increased uncertainty, which makes gold a more desirable asset. Many investors retreat to gold during hard economic times, and central banks could also be attempting to get a headstart.
The continued conflicts between Israel and Hamas in addition to Ukraine and Russia have already contributed to increases in gold prices over the past few years.
Do you have to buy gold just like the central banks?
Central banks have been buying gold for a few years in an effort to diversify their holdings. The recent and sudden uptick in gold purchases has brought more attention to the dear metal. Up to now in 2024, gold has outperformed the S&P 500 year-to-date and has favorable tailwinds as a result of Federal Reserve rate cuts and global uncertainty.
Nevertheless, inflation is dropping and is back to historical averages. Lower rates of interest will likely increase inflation, nevertheless it’s unlikely that inflation will reach the highs of 2022 anytime soon. Even with inflation peaking that 12 months, gold remained a priceless asset, demonstrating its role as a store of value.
The physical asset’s intrinsic value stays intact at the same time as central banks proceed to print money. Gold is a vital resource, not only as a medium of exchange but in quite a few business applications, including dentistry, jewelry, electronics, automobiles and other high-demand services and products.
Gold will proceed to realize value as the cash supply grows. The dear metal is time-tested and has retained its value for 1000’s of years. Nevertheless, investors should assess their risk tolerance and objectives before accumulating gold.