Central Banks Hold More Gold Than Ever, But Is It Enough?

Once net sellers of gold, central banks in recent years have become net buyers of gold. In fact, by some estimates central banks around the world now hold more gold than ever.

But why are they buying so much gold? And have the purchases they have made in recent years been enough to protect them against the problems and dangers they foresee?

Conducting Monetary Policy

As powerful as central banks can be within their own economies, not all of them have significant amounts of power. As Americans, our perceptions of central banks and central banking are shaped by the behavior of the Federal Reserve, arguably the world’s most important and most powerful central bank.

The Fed has the unique status of being the issuer of the world’s reserve currency, the US dollar. That gives the Fed a tremendous amount of power not just domestically but internationally as well.

Most other central banks around the world are forced to react to the moves the Fed makes. If the Fed is an aircraft carrier coming into port, other central banks are like fishing boats trying not to get swamped as they navigate through the Fed’s wake.

As the issuer of the world’s reserve currency, the Fed is in a unique position. The entire world demands its currency and uses it for international trade or for foreign exchange reserves.

But that’s a double edged sword as well for those central banks. The more the Fed inflates the money supply and devalues the dollar, the less valuable the dollar holdings of foreign central banks become.

Those central banks also have to, in many cases, mirror the Fed’s actions in order to keep their own national currencies from appreciating too strongly. And that requires them often to react to monetary policy rather than acting first.

Central Banks and Gold

One of the ways that these other central banks can try to protect themselves is by buying and holding gold. After all, the long-term trend in the gold price is for the gold price to rise, just like the long-term trend for the value of the US dollar is to fall.

Since the Fed’s creation in 1913, the US dollar has lost 97% of its purchasing power, while the price of an ounce of gold has risen over 9,000%. Since 1971, when President Nixon closed the gold window and severed the last official link between the dollar and gold, the dollar has lost 87% of its purchasing power, while the price of gold has risen over 5,000%.

If you’re a central bank looking at the long-term strength and health of your balance sheet, not to mention looking at the current economic climate, which would you choose to buy more of: dollars or gold?

While holding dollars is a necessity to engage in foreign exchange and currency stabilization, when it comes to long-term maintenance of value, it’s hard to beat gold. And that is probably one of many reasons that central banks around the world are continuing to buy gold.

Another reason is that central banks are at the forefront of combating recessions. And the recession that seems to be on the way could end up being a doozy.

Central banks want to ensure that they are in a position to protect themselves and their currencies in the event of recession. Unlike the Fed, which can create dollars out of nothing and find a ready market for them, most central banks don’t have the luxury of printing their way out of trouble.

They need ready assets that are valuable, liquid, stable in price and, most importantly, in demand by others. Gold fits that bill.

The Advantages of Gold

Gold has been treasured as a safe haven asset and store of wealth for centuries. Its ability to maintain its value over time continues to make it a safe haven choice not just for central banks but for individuals too.

While central banks may be buying gold at a record pace, gold demand from individuals is growing as well. Just like central banks, individuals are looking to protect their financial well-being with gold.

Many Americans remember the 2008 financial crisis, and how badly their assets lost value. Many undoubtedly also remember how badly their investment portfolios fared.

Markets lost more than 50% of their value, eroding the value of savings that had taken years or decades to build up. The years after the market crash weren’t much better, with markets struggling to regain their footing.

While all that was going on, however, gold was going on a tear. During the same period that markets lost more than 50% of their value (October 2007 to March 2009), the gold price rose 25%. And from its 2008 lows, the gold price nearly tripled in price by 2011, setting an all-time high.

Gold set new all-time highs in 2020, and flirted with them again this year. Right now the gold price is pushing back to the $2,000 mark as economic headwinds press against the economy. With recession seemingly becoming ever more likely each month, could the gold price end up pushing significantly higher as gold’s safe haven status spurs further demand?

We’re in a time of great uncertainty and fear, with bank failures, inflation, and war stoking unease about the future. That’s why the certainty and stability that gold offers is so enticing to so many people today.

Today there are more options than ever to buy gold, from opening a gold IRA to protect your tax-advantaged retirement savings, to making direct cash purchases of gold coins or bars to store at home. No matter which way you choose to buy gold, Goldco has options available for you.

With over $2 billion in precious metals placements and thousands of satisfied customers, Goldco has spent years becoming one of the biggest and most trusted names in the precious metals industry. Our specialists can answer your questions about how gold IRAs work, how IRA rollovers work, the various types of gold coins and bars you can buy, and any other questions you may have about gold.

If you’re worried about the future and looking to protect your financial well-being, talk to the experts at Goldco to learn more about how you can put gold to work in securing your financial future.