Central Banks Buying Gold at Record Pace

With gold prices still well below their all-time highs, it isn’t just retail investors who have been taking advantage of gold still being “on sale” to fill up their vaults. Central banks are buying gold too, and at a record pace.

Total central bank gold purchases for the third quarter of 2022 were just under 400 tonnes, a record for the third quarter and a more than 300% increase from the third quarter of 2021. And the total annual gold purchases by central banks this year will be the highest since 1967.

Back then it was the turbulence in currency markets and the collapse of the London gold pool that worked together to fuel central bank gold demand. Today it’s the fear of recession and the desire to shore up balance sheets ahead of a crisis that is helping to spur central bank gold demand.

Who Is Buying Gold?

Central banks aren’t the only ones buying gold today, as anyone who has tried to buy gold coins knows. Investor demand for gold (and silver) has skyrocketed so much that physical supply of coins is becoming an issue for many people.

Total coin and bar demand for the third quarter was over 350 tonnes, with a 74% increase in gold coin demand from last year and a 24% increase in gold bar demand. By contrast, demand from gold ETFs was down significantly, with ETFs offloading over 225 tonnes of gold holdings. That’s an interesting bifurcation in investor demand, and a telling indicator of the difference in outlook between those investors who value physical gold and those who prefer paper gold.

Of course, by now the many disadvantages of gold ETFs are well known. And perhaps that’s why demand for physical gold has skyrocketed.

There are two primary ways in which investors buy and hold physical gold today. The first is through a gold IRA, which allows investors to buy physical gold coins and bars while still enjoying the same tax advantages of a conventional IRA account. The second is through buying gold coins that can be delivered to your doorstep.

With a gold IRA, investors can buy physical gold coins and bars and hold them in an IRA account. These assets are managed by a custodian and stored in a bullion depository. Gains accrue tax-free just like with any other IRA account, and when you take a distribution you can take it either in cash or as an “in kind” distribution of physical gold. So the coins you decide to buy for your gold IRA are the coins you can take possession of when you take a distribution.

A gold IRA is just like any other IRA and is subject to the same rules and regulations as any other IRA. And because it can be funded through a tax-free rollover or transfer from an existing 401(k), 403(b), TSP, IRA, or similar retirement account, it can be a way to protect your existing retirement savings with an investment in physical gold.

If you don’t have a lot of money in retirement accounts that you want to invest in gold, if you would rather protect your cash holdings and cash-equivalent investments, or if you would just prefer to take physical possession of your gold coins now rather than later, there are always direct cash purchases of gold coins. You can purchase coins that can be delivered to you directly, or if you’re purchasing a lot of coins you can choose to have them stored in a depository.

Many investors like the ability to maintain personal physical possession of their gold coins. Their gold is less of an investment in that case than a hedge and protection against a catastrophic crisis that destroys the monetary and banking system. And as many people say, if you can’t touch it you don’t really own it.

The Benefits of Gold

Perhaps that’s one reason central banks are stocking up on gold. They realize that we’re facing a severe recession, and are looking to shore up their balance sheets ahead of that. And they realize that gold is the ultimate form of money and will maintain its value even if paper currencies are inflated into oblivion.

Central banks are also taking advantage of the fact that the gold price is still relatively affordable. At these prices it makes sense to stock up ahead of a recession, as the price could rise significantly once recession occurs. Depending on the severity of the next recession, there’s a good chance that prices could rise to challenge gold’s all-time highs.

Gold has long served as an inflation hedge and a safe haven asset, guarding against economic turmoil and financial crisis for centuries. And it can serve in that capacity for both individuals and institutions.

Gold also helps to diversify portfolios, something that both central banks and individual investors can benefit from. For central banks, owning gold helps to diversify reserves, which otherwise might just consist of foreign currencies or foreign currency-denominated assets. By buying gold, central banks diversify their holdings and reduce the risk that their reserve holdings might be subject to swings and fluctuations in currency markets.

For individual investors, owning gold can similarly help to diversify a portfolio. Many investors think that a mix of stocks and bonds is enough diversification, but in the event of a systemic crisis both stock and bond markets can be susceptible to major losses. Investing in a diverse portfolio across asset classes, industries, and regions can help reduce the risk profile of a portfolio that is too highly concentrated in any one area.

As with any investment, however, your decision to invest should be based on your personal circumstances and your financial goals. What works for one person may not work for another. But if you’ve decided that you want to safeguard your savings with gold, or even if you just want to learn more about the benefits of a gold IRA, call the precious metals experts at Goldco today to put yourself on the path to protecting your wealth with gold.