Why are central banks buying gold?

01.10.2021

It is needless to say that gold is one of the eternal values. For thousands of years it has been the measure of wealth and prosperity. But in the XXI century there are many other assets that are profitable, you might say. So why is gold still so much in demand at both the national and international levels? Central banks in various countries still have their "gold reserves," and buying gold remains an important part of their work. Why do they do it? Let's find out more in our Golden Way blog!

A little bit of history

Up to the middle of XX century gold was the physical support for many currencies. This phenomenon was called "the gold standard". Prior to the introduction of paper money, gold was quite appropriately used as a monetary asset. But after banknotes supplanted coins in the market, the function of gold began to decline. However, by 1971 the United States, as one of the leading powers in the world, had abandoned the "gold standard," and dollars were no longer backed by gold. Other countries gradually gave up the idea of backing their currencies with gold. But the value of the yellow metal did not decrease at all. Each country began to diversify its portfolio with money supply and gold reserve simultaneously.

How are things today?

According to Bloomberg analysts, last year central banks have reduced purchases of gold to a ten-year minimum. In terms of tons, that amounted to 326.3 tons of bars purchased by central banks. But in 2021 the forecasts are much more optimistic. It is expected that the purchase of gold will increase again and analysts expect that the amount of bought precious metal in the assets of central banks will be more than 400 tons.

Why do central banks need gold?

  1. An escape from inflation. We've already covered why gold is better than fiat money. Central banks also see their gold reserves as a hedge against inflation.
  2. Diversification of reserves. Many countries have to hold part of their reserves in liquid currencies, such as the U.S. Dollar and the Euro, in addition to their own currency reserves. Gold eliminates the need to buy other nations currencies to diversify the reserve portfolio.
  3. Gold is one of the most effective forms of protection against risks of market collapse. Whatever the financial crisis, gold allows you to reduce its effects on the country.
  4. Gold is little exposed to devaluation and at the same time is quite highly liquid. In other words, it is a guaranteed reserve that can be kept for a "rainy day" and sold quickly and at a predictable price without any critical spikes.

All this makes gold still one of the fundamental pillars of the world economy. For central banks it is the most reliable asset that is not inclined to devaluation. In the future analysts predict that central banks' purchases of gold for their gold reserves will triple by 2023. Therefore, private investors should take into account such a strategy. Central banks are setting the direction of the economy. Why shouldn't we follow their lead?

If you're not sure yet where to buy gold for your investment portfolio, the Golden Way is a safe and lucrative way to get started as a gold investor. Just visit our store and choose high quality bars. We meet all LBMA standards and sell ingots that we produce ourselves. Rest assured that gold is always a profitable investment for your money.