As the global economy enters the first months of what is expected to be one of the worst recessions in history, central banks around the world are showing increased interest in gold. According to the World Gold Council’s recently released gold reserves survey, more central banks are now intending to increase their gold reserves.
Akin to private investors, prompted by the current economic crisis, central banks and financial institutions are turning to gold in order to safeguard national wealth.
Since the 2008 financial crisis, many central banks have increased their gold reserves after seeing some of the weakness and risks inherent in the fiat currency system. Since then, multiple countries have turned large amounts of their national wealth into gold reserves, and the past 10 consecutive years have seen net growth in purchases.
Central bank net gold purchases from 1999 to 2019.
The latest report from the World Gold Council however shows that central banks now intend to go further and convert more of their national wealth into gold in light of the current pandemic and the ongoing economic fallout.
Most notably, the survey indicated that 20% of central banks are planning to expand their gold reserves within the next 12 months, compared to just 8% in 2019. Given the record levels of reserve buying in 2018 and 2019, if the survey proves accurate then 2020 will likely see new records set.
Negative and near-zero interest rates were specifically mentioned by 88% of respondents to the survey as a reason for buying gold. With negative interest rates under consideration to help ailing economies, many banks will be worried about the eroding value of their holdings, and considering the increase in value gold has experienced in recent months converting to gold could certainly help protect their national wealth, while potentially even growing it.
74% of those surveyed notably mentioned that gold’s ‘lack of default risk’ was an important consideration in holding the metal. National debt is expected to rise significantly to fund the huge bailouts governments have been forced to make, in order to keep furloughed workers and struggling business from financial ruin. This rise in debt increases the risk of a potential catastrophic default, and this is clearly on the minds of central banks given this reports mention of gold’s lack of comparable default risk.
In the near-term, banks will be focused on keeping their national economies afloat, but as time goes on it seems they will turn their attention to gold. The unpredictable nature of the economic damage the pandemic will cause is clearly worrying many of the world’s financial overseers. Compounding on the already positive trends of the past decade, the further interest this has sparked could then see significant purchases of gold reserves to come in the latter half of the year and into 2021.
