Are Central Banks Behind Gold’s Current Performance?

While 2022 may have been a disappointing year overall for gold, 2023 has gotten off to an amazing start, with the yellow metal blowing through the $1,900 barrier and pushing ever higher. But while investor demand certainly seems to be strong, could something else be helping push the gold price higher?

Record Gold Demand

According to the World Gold Council, total gold demand in 2022 was 4,741 tonnes, the highest level on record since 2011. Much of that was due to the very strong demand in the fourth quarter, accounting for over 28% of the year’s total gold demand. And a large part of overall gold demand was due to record demand from central banks.

Over the course of the year, central banks purchased 1,136 tonnes of gold, a 55-year high. According to the World Gold Council, many of those gold purchases were unreported by central banks. In other words, central banks were buying massive amounts of gold but didn’t want world markets to find out.

So why might they be buying gold?

Central Banks and Gold

There are numerous factors behind the decisions of central bankers to buy gold. A recent International Monetary Fund working paper tries to argue that fear of sanctions might be one reason central banks are starting to stock up on gold. Holding gold could be a hedge against direct sanctions or the indirect effects of sanctions for those countries who may not be able to break away from relationships with sanctioned nations.

But an arguably stronger reason for buying gold is to hedge against economic and geopolitical risk. Particularly for smaller nations who may not be able to weather an economic crisis as well as larger nations, holding tangible reserves could be incredibly important.

In that respect, central banks aren’t that much different from individual investors, many of whom own gold to try to hedge against the possibility of loss from inflation or recession. And just like central bank demand, investor demand increased last year as well.

Investment Demand for Gold

Total demand for gold coins and bars was over 1,200 tonnes last year, the highest level in nearly a decade, but still far below the peak of 1,730 tonnes in 2013. It was a small increase from the year before, but significantly larger than the 904 tonnes of demand in 2020.

Surprisingly, however, gold exchange-traded funds (ETFs) were net sellers of gold. That helps to underscore the differing motives and motivations of the different types of gold investors.

Gold ETFs were developed to give mainstream investors a relatively easy way to expose themselves to movements in the price of gold, without having to deal with the burden of owning gold. That has its drawbacks.

For one thing, shares in gold ETFs can’t be converted into gold. So if you thought you could convert those shares into gold bars or coins eventually, you’re out of luck. For another thing, the network of custodians, sub-custodians, and sub-custodians handling the gold that ETFs supposedly own can be so opaque that no one really knows where the gold is or who is holding it.

Your average ETF investor isn’t someone who looks at gold as a tangible investment asset, a hedge, or a way to diversify a portfolio. They’re probably looking at gold as another asset that they can buy low and sell high, as quickly as possible.

Compare that to your average gold investor, who understands the appeal of gold as a long-term investment asset. These investors understand that buying gold isn’t a way to get rich quick, nor is it a short-term investment asset. It’s something to hold on to for the long term, something that maintains its purchasing power over the long run and can help protect you through times of economic turmoil and financial crisis.

That difference in mindset helps to explain why ETFs sold gold while demand for coins and bars grew. ETF investors saw gold declining in price last year and decided to cut their losses so that they wouldn’t lose more money. But physical gold investors saw gold declining in price despite the threat of recession and realized that gold was on sale, so they stocked up. Now that gold is up over $300 an ounce since last October, who do you think is having the last laugh?

Gold and You

The increased demand from both central banks and individual investors for physical gold has helped to drive gold prices higher. With inflation still high and with the prospects for recession seemingly growing every day, everything seems to be lining up for gold to continue growing in price this year.

If you haven’t decided to buy gold yet, what are you waiting for? Are you like the ETF investors who view gold as an asset to buy and sell whenever you get the whim? Or do you believe that gold should be part of your long-term wealth protection plan?

With strong demand from investors and central banks, economic headwinds pointing towards recession, and a future that seems increasingly uncertain, the groundwork is being laid for gold to make another run at breaking its all-time high price. And if a worst-case scenario comes to pass, say another Great Depression or another decade of stagflation, gold could end up becoming one of the star assets of the next few years.

Remember that gold grew at more than a 30% annualized rate throughout the 1970s, a decade that was marred by high inflation and economic stagnation. Perhaps that’s why central bankers are choosing to stock up on gold today, hoping to hedge against the possibility of a repeat of the 1970s. And it’s not too late for you to do the same too.

Whether you decide to protect your retirement savings with a gold IRA or just buy gold coins to store at home, gold can play a useful role in helping to protect your savings and investments against market downturns, inflation, and economic uncertainty. Call the experts at Goldco today to learn more about how to make gold a part of your asset protection plan.